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Money Velocity and the Natural Rate of Interest

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  • Luca Benati

Abstract

M1 velocity is, approximately, the permanent component of the short-term rate. This implies that agents in deciding how much wealth to allocate to non interest bearing M1, as opposed to interest-bearing assets almost uniquely react to permanent shocks to the opportunity cost, essentially ignoring transitory shocks. This suggests that money-demand models must be modified to allow for such distinct reaction to permanent and transitory variation in the opportunity cost of holding M1. Under monetary regimes making inflation stationary, permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest.

Suggested Citation

  • Luca Benati, 2020. "Money Velocity and the Natural Rate of Interest," Diskussionsschriften dp2022, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp2022
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    2. Michael Ellington, 2022. "The Empirical Relevance of the Shadow Rate and the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1605-1635, September.

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    More about this item

    Keywords

    Money demand; unit roots; cointegration; structural VARs; natural rate of interest.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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