Working Paper: NBER ID: w22100
Authors: Richard G. Anderson; Michael Bordo; John V. Duca
Abstract: This study offers a single, consistent model that tracks the velocity of broad money (M2) since 1929, including the Great Depression, the global financial crisis, and the Great Recession. The model emphasizes the roles of changes in uncertainty and risk premia, financial innovation, and major banking regulations. Our findings suggest an enhanced role of a broad, liquid money aggregate as a policy guide during crises and their unwinding. Following crises, policymakers face the challenge of not only unwinding their balance sheet so as to prevent excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from relevant financial reforms.
Keywords: Money Demand; Financial Crises; Velocity of Money; Risk Premia; Financial Innovation
JEL Codes: E41; E50; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk premia (G22) | M2 velocity (E41) |
| financial crises (G01) | M2 velocity (E41) |
| financial innovations (O16) | demand for money (E41) |
| financial innovations (O16) | M2 velocity (E41) |
| changes in banking regulations (G28) | demand for money (E41) |
| changes in banking regulations (G28) | M2 velocity (E41) |
| risk premia (G22) | economic activity (E20) |
| M2 velocity (E41) | economic activity (E20) |