Working Paper: NBER ID: w2255
Authors: Michael D. Bordo; Lars Jonung
Abstract: A number of recent studies have concluded that velocity for the United States for the past century displays the characteristics of a random walk without drift. In this study, we confirm this result for four other countries for which we have over a century of data -- Canada, the United Kingdom, Sweden and Norway. One implication of a random walk is that past changes in velocity cannot be used to predict future changes. However, this does not mean that past changes in variables that economic theory deems important determinants of velocity cannot be used to predict future changes. In this study we find that past changes in the traditional determinants of velocity - permanent income and interest rates, as well as a number of institutional variables, can be used to predict future changes in velocity.
Keywords: velocity; random walk; monetary economics; predictive determinants
JEL Codes: E40; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| permanent income (D31) | velocity (E41) |
| interest rates (E43) | velocity (E41) |
| past changes in velocity (E41) | future changes in velocity (E41) |
| traditional determinants of velocity (E41) | predictive accuracy of velocity (C52) |
| lagged changes in velocity (E41) | autoregressive process (C22) |