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Financial Instability and Money Velocity - Evidence from the Financial Crisis

Author

Listed:
  • Svatopluk Kapounek

    (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)

  • Jana Kralova

    (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)

Abstract

We focus on the financial instability hypothesis defined as rapid credit growth accompanied with a significant increase in asset prices. We used contribution of the national banking systems within the euro area and identified significant relationship between the money velocity and asset prices before the financial crisis in the year 2007. Finally, we applied cointegration analysis and weak exogeneity tests to identify causality between the money supply created by the national banking systems, economic activity and asset prices. We found heterogeneity in cointegration relations within the euro area. Our recommendations follow Post Keynesian assumptions in relation to the endogeneity of money.

Suggested Citation

  • Svatopluk Kapounek & Jana Kralova, 2014. "Financial Instability and Money Velocity - Evidence from the Financial Crisis," MENDELU Working Papers in Business and Economics 2014-44, Mendel University in Brno, Faculty of Business and Economics.
    • Handle: RePEc:men:wpaper:44_2014
    as

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    References listed on IDEAS

    as
    1. Frederic S. Mishkin & Eugene N. White, 2002. "U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," NBER Working Papers 8992, National Bureau of Economic Research, Inc.
    2. repec:zbw:bofrdp:2007_002 is not listed on IDEAS
    3. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2013. "Leading indicators of crisis incidence: Evidence from developed countries," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 1-19.
    4. Lucia Alessi & Carsten Detken, 2009. "Global liquidity as an early warning indicator for asset price boom/bust cycles," Research Bulletin, European Central Bank, vol. 8, pages 7-9.
    5. Sofía Bauducco & Aleš Bulir & Martin Èihák, 2011. "Monetary Policy Rules with Financial Instability," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(6), pages 545-565, December.
    6. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    7. Garry J. Schinasi, 2009. "Defining Financial Stability and a Framework for Safeguarding It," Working Papers Central Bank of Chile 550, Central Bank of Chile.
    8. Detken, Carsten & Alessi, Lucia, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
    9. Basil J. Moore, 1979. "The Endogenous Money Stock," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 2(1), pages 49-70, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial instability hypothesis; national contribution to the monetary aggregate; money velocity; weak exogeneity test;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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