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Trends in velocity and policy expectations

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Author Info

  • Gordon, David B.
  • Leeper, Eric M.
  • Zha, Tao

Abstract

U.S. velocity of base money exhibits three distinct trends since 1950. After rising steadily for thirty years, it flattens out in the 1980s and falls substantially in the 1990s. This paper explores whether the observed secular movements in velocity can be accounted for exclusively by endogenous responses to changing expectations about monetary and fiscal policy. We use a model with two key features: a substitute for money in transactions and an array of assets that includes money, nominal bonds, and physical capital. The model maps policy expectations into portfolio decisions, making equilibrium velocity a function of expected future money growth, tax rates, and government spending. When expectations are estimated using Bayesian updating, simulated velocity matches the trends in actual velocity surprisingly well.

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Bibliographic Info

Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 49 (1998)
Issue (Month): 1 (December)
Pages: 265-304

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Handle: RePEc:eee:crcspp:v:49:y:1998:i::p:265-304

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Web page: http://www.elsevier.com/locate/jme

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Cited by:
  1. Weimin Wang & Shouyong Shi, 2006. "The Variability of Velocity of Money in a Search Model," Working Papers tecipa-190, University of Toronto, Department of Economics.
  2. Jana Hromcová, 2004. "On The Income Velocity Of Money In A Cash-In-Advance Economy With Capital," Working Papers. Serie AD 2004-21, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Gokan, Yoichi, 2002. "Alternative government financing and stochastic endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 681-706, April.
  4. Eric M. Leeper, 2003. "Fiscal Policy and Inflation: Pondering the Imponderables," NBER Working Papers 9506, National Bureau of Economic Research, Inc.
  5. David B. Gordon & Eric M. Leeper, 2002. "The Price Level, the Quantity Theory of Money, and the Fiscal Theory of the Price Level," NBER Working Papers 9084, National Bureau of Economic Research, Inc.
  6. Joseph H. Haslag, 1999. "Has monetary policy become less effective?," Working Papers 9906, Federal Reserve Bank of Dallas.

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