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An algorithm for estimating the volatility of the velocity of money

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  • Alikhanov, Murat
  • Taylor, Leon

Abstract

Most macroeconomic models, such as the IS-LM, assume equilibrium in money markets. Since money demand is an inverse function of velocity, an inaccurate estimate of velocity will lead to errors in calculating the monetary and general equilibria. This note suggests a way to gauge the potential error in estimating velocity. The algorithm arises from the quantity equation of exchange, which one may prefer to an ad hoc model of velocity.

Suggested Citation

  • Alikhanov, Murat & Taylor, Leon, 2013. "An algorithm for estimating the volatility of the velocity of money," MPRA Paper 49313, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:49313
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    File URL: https://mpra.ub.uni-muenchen.de/62902/1/MPRA_paper_62902.pdf
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    References listed on IDEAS

    as
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    2. Thornton, Daniel L & Batten, Dallas S, 1985. "Lag-Length Selection and Tests of Granger Causality between Money and Income," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 164-178, May.
    3. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    4. Hall, Thomas E & Noble, Nicholas R, 1987. "Velocity and the Variability of Money Growth: Evidence from Granger-Causality Tests: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 112-116, February.
    5. Benjamin M. Friedman, 1984. "Lessons from the 1979-1982 Monetary Policy Experiment," NBER Working Papers 1272, National Bureau of Economic Research, Inc.
    6. Yash P. Mehra, 1987. "Money growth volatility and high nominal interest rates," Economic Review, Federal Reserve Bank of Richmond, vol. 73(Nov), pages 10-19.
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    8. Thornton, John, 1995. "Friedman's Money Supply Volatility Hypothesis: Some International Evidence: Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 288-292, February.
    9. Brocato, Joe & Smith, Kenneth L, 1989. "Velocity and the Variability of Money Growth: Evidence from Granger-Causality Tests: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 258-261, May.
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    More about this item

    Keywords

    monetary policy; simulations; forecasting in transitional economies; mathematical statistics in economics;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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