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Institutional Hypothesis of the Long-Run Income Velocity of Money and Parameter Stability of the Equilibrium Relationship

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  • Raj, Baldev

Abstract

It has recently been argued that when the conventional specification of M2 income velocity is extended to include proxies for two types of institutional change, as emphasized by Bordo and Jonung (1987, 1990), corresponding to the process of monetization and increasing financial sophistication of financial developments, this extended model is stable in the sense that one can reject the null hypothesis of no cointegration against the alternative of a single cointegrating vector. There may by implications that such an equilibrium relation is a structural income velocity of money function. The evidence based on century-long data from 1880 to 1986 presented in this paper about parameter instability of the cointegrating vector of velocity with its determinants for Canada, Norway, Sweden, and the United Kingdom casts doubt on this interpretation. The evidence is based on using formal stability tests. Moreover, it has an "eyeball" support from the sequential estimates of various parameters of the cointegrating relationship including income and interest semi-elasticities. Copyright 1995 by John Wiley & Sons, Ltd.

Suggested Citation

  • Raj, Baldev, 1995. "Institutional Hypothesis of the Long-Run Income Velocity of Money and Parameter Stability of the Equilibrium Relationship," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(3), pages 233-253, July-Sept.
    • Handle: RePEc:jae:japmet:v:10:y:1995:i:3:p:233-53
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    Cited by:

    1. Habibullah, Muzafar, 1999. "Using P-Star Model to Linking Money and Prices in A Financial Liberalised Developing Economy: The Case for Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 33, pages 123-140.
    2. Serpil Canbas & Murat Doganlar & Yildirim B.Onal, 2002. "Measurement of Foreign Exchange Exposure on the Turkish Private Banks’ Stock Prices," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 6(22), pages 17-32.
    3. Tomáš Havránek & Jana Sedlaříková, 2014. "Meta-analýza důchodové elasticity poptávky po penězích [A Meta-Analysis of the Income Elasticity of Money Demand]," Politická ekonomie, Prague University of Economics and Business, vol. 2014(3), pages 366-382.
    4. Fatih Cin & Fikret Dulger, 2002. "Income Velocity of Money (M2): The Case of Turkey, 1986-2000," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 6(22), pages 33-48.
    5. Mark Holmes, 2000. "The Velocity of Circulation: Some new evidence on international integration," International Review of Applied Economics, Taylor & Francis Journals, vol. 14(4), pages 449-459.
    6. Tulay Yucel & Gulizar Kurt, 2002. "Cash Conversion Cycle, Cash Management and Profitability: An Empirical Study on the ISE Traded Companies," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 6(22), pages 1-16.

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