Money Velocity with Interest Rate Stochastic Volatility and Exact Aggregation
AbstractThe determinants of money velocity are theoretically explored under various assumptions of interest rate uncertainty in a monetary general equilibrium model. Money is introduced by putting monetary services in the utility function. Monetary assets pay interest. When interest rates are uncertain, it is found that the degree of risk aversion in consumers' preferences and the risk in the return rates of the benchmark asset affect both the intercept and slope of the money velocity function, while the risk in return rates of monetary assets only affects the intercept of the money velocity function. The traditional money velocity function would become unstable if covariances change over time between interest rates and consumption growth rate or between interest rates and real money growth rate. We simulate the model developed in this paper and find that the coefficients of the money velocity function are volatile. The Swamy and Tinsley (1980) random coefficient model is then estimated with money velocity data to compare the results with those from model simulation. It is found that the estimated stochastic slope coefficient of the velocity function behaves in a manner that is approximately consistent with the simulation results.
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Bibliographic InfoPaper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201224.
Length: 24 pages
Date of creation: Sep 2012
Date of revision: Sep 2012
Other versions of this item:
- William A. Barnett & Haiyang Xu, 1998. "Money Velocity with Interest Rate Stochastic Volatility and Exact Aggregation," Macroeconomics 9803004, EconWPA.
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- 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
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-09 (All new papers)
- NEP-CBA-2012-09-09 (Central Banking)
- NEP-MAC-2012-09-09 (Macroeconomics)
- NEP-MON-2012-09-09 (Monetary Economics)
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