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Money and Velocity During Financial Crises: From the Great Depression to the Great Recession

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  • Richard G. Anderson
  • Michael Bordo
  • John V. Duca

Abstract

This study offers a single, consistent model that tracks the velocity of broad money (M2) since 1929, including the Great Depression, the global financial crisis, and the Great Recession. The model emphasizes the roles of changes in uncertainty and risk premia, financial innovation, and major banking regulations. Our findings suggest an enhanced role of a broad, liquid money aggregate as a policy guide during crises and their unwinding. Following crises, policymakers face the challenge of not only unwinding their balance sheet so as to prevent excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from relevant financial reforms.

Suggested Citation

  • Richard G. Anderson & Michael Bordo & John V. Duca, 2016. "Money and Velocity During Financial Crises: From the Great Depression to the Great Recession," Economics Working Papers 16111, Hoover Institution, Stanford University.
  • Handle: RePEc:hoo:wpaper:16111
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    3. Michael T. Belongia & Peter N. Ireland, 2017. "The Demand for Divisia Money: Theory and Evidence," Boston College Working Papers in Economics 937, Boston College Department of Economics.
    4. Hetzel, Robert L., 2015. "What is the Monetary Standard," Working Paper 15-16, Federal Reserve Bank of Richmond.
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    10. Michael D. Bordo, 2014. "Exiting from Low Interest Rates to Normality: An Historical Perspective," Economics Working Papers 14110, Hoover Institution, Stanford University.

    More about this item

    Keywords

    money demand; financial crises; monetary policy; liquidity; financial innovation;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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