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Velocity and the variability of money growth: evidence from Granger- causality tests reevaluated

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  • Yash P. Mehra
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    Abstract

    Hall and Nobel (1987) use the Granger-causality test to show that volatility influences velocity, leading them to conclude that the recent decline in the velocity of Ml is due to increased volatility of money growth which is alleged to be caused by the Federal Reserve's new operating procedures. This note shows that such a conclusion is unwarranted, because the causality result reported in their paper is not robust. When the test is implemented either using first differences of the volatility variable or using the volatility and velocity variables that are based on the broad definition of money or over the sample period that includes the 1985-86 episode of the decline in the velocity of Ml, then the test results do not support the inference that volatility influences velocity.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 87-02.

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    Date of creation: 1987
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    Handle: RePEc:fip:fedrwp:87-02

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    Keywords: Velocity of money ; Money supply;

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    1. Bharat Trehan & Carl E. Walsh, 1987. "Portfolio Substitution And Recent M1 Behavior," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 54-63, 01.
    2. Lawrence J. Christiano & Lars Ljungqvist, 1987. "Money does Granger-cause output in the bivariate output-money relation," Staff Report 108, Federal Reserve Bank of Minneapolis.
    3. Friedman, Milton, 1983. "Monetary Variability: United States and Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 339-43, August.
    4. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    5. Mascaro, Angelo & Meltzer, Allan H., 1983. "Long- and short-term interest rates in a risky world," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 485-518, November.
    6. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
    7. John Wenninger, 1986. "Responsiveness of interest rate spreads and deposit flows to changes in market rates," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 1-10.
    8. Ohanian, Lee E., 1988. "The spurious effects of unit roots on vector autoregressions : A Monte Carlo study," Journal of Econometrics, Elsevier, vol. 39(3), pages 251-266, November.
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