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Financial Sector Weakness and the M2 Velocity Puzzle

Author

Listed:
  • Cara Lown
  • Stavros Peristiani
  • Kenneth J. Robinson

Abstract

Deterioration in the link between M2 and GDP, along with large prediction errors, led the Federal Reserve to downgrade M2 as a reliable indicator in 1993. We argue that the financial condition of depository institutions was a major factor behind this unusual pattern of M2 growth. When constructing measures of M2 based on banks' and thrifts' capital positions, we obtain superior M2 forecasting results and a more stable relationship between M2 and the ultimate goals of policy. M2 may contain useful information when there are no major disturbances to depository institutions. (JEL E4, E5, G2) Copyright 2006, Oxford University Press.

Suggested Citation

  • Cara Lown & Stavros Peristiani & Kenneth J. Robinson, 2006. "Financial Sector Weakness and the M2 Velocity Puzzle," Economic Inquiry, Western Economic Association International, vol. 44(4), pages 699-715, October.
    • Handle: RePEc:oup:ecinqu:v:44:y:2006:i:4:p:699-715
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    File URL: http://hdl.handle.net/10.1093/ei/cbl009
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    Citations

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    Cited by:

    1. Silvio Contessi & Johanna L. Francis, 2011. "TARP beneficiaries and their lending patterns during the financial crisis," Review, Federal Reserve Bank of St. Louis, vol. 93(Mar), pages 105-126.
    2. Sophie Altermatt, 2018. "The Long-Run Demand for M2 Reconsidered," Diskussionsschriften dp1824, Universitaet Bern, Departement Volkswirtschaft.
    3. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services

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