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Velocity in the 1980s: an analysis of interactions among monetary components

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  • John P. Judd
  • Bharat Trehan

Abstract

We use vector autoregressions to examine the behavior of the velocities of alternative monetary aggregates, focusing on the role of disinflation and deregulation during the 1980s. By estimating a single system that contains income, prices, interest rates and the components of M3, we are able to analyze how interactions among those components affect the behavior of the velocities of M1, M1A, and M3. The analysis suggests that other checkable deposits, the deregulated component of M1, behave more like the relatively liquid savings-type deposits in M2 than the transactions deposits in M1A. This and other results support the hypothesis that deposit-rate deregulation largely is responsible for the instability in the velocity of M1 (V1) since early 1985, although disinflation probably accounts for most of the unexpected decline in V1 in the early 1980s. Even though M1A contains no deregulated accounts, the stability of its velocity also has been adversely affected by deregulation. Finally, since M3 is broad enough to internalize most of the portfolio components, the velocity of M3 has been affected relatively little by deregulation, and it is significantly more stable than that of either M1 or M1 A.

Suggested Citation

  • John P. Judd & Bharat Trehan, 1987. "Velocity in the 1980s: an analysis of interactions among monetary components," Working Papers in Applied Economic Theory 87-05, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:87-05
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    Cited by:

    1. John P. Judd & Bharat Trehan, 1987. "Portfolio substitution and the reliability of M1, M2 and M3 as monetary policy indicators," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 5-29.

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