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Stability of Velocity in the Group of Seven Countries; A Kalman Filter Approach

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  • Eduard J Bomhoff
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    This paper estimates forecasting models using annual data for the income velocity of money in the G-7 countries. The predictions are conditional upon the realized value of the long-term domestic government bond rate. Such conditional forecasts did not deteriorate over the period 1980-1988 as compared with the earlier postwar period. Velocity of M1 is found to be very interest-elastic in almost all countries; velocity of M2 less so. The specifications (based on Kalman filters and smoothers) point to a non-constant (stochastic) trend in velocity, hence questioning the assumptions required for the cointegration techniques used in other research on the demand for money.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/80.

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    Length: 34
    Date of creation: 01 Sep 1990
    Handle: RePEc:imf:imfwpa:90/80
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