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The Response Of Financial And Goods Markets To Velocity

  • Flavio Padrini

    (Ministry of the Treasury, Italy)

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    It is commonly thought that interest rates should decrease in response to a positive velocity innovation. Velocity innovations, therefore, should lead to the same qualitative effects in the financial and goods markets as money supply innovations. The present paper represents an empirical investigation of the above theoretical statements. By using structural Vector Autoregression (VAR) methods, the responses of interest rates, equity prices, consumer prices and output to velocity and money supply innovations are assessed for the United States. The empirical results do not seem to confirm the traditional analysis. In fact, money supply and velocity innovations seem to affect financial markets in opposite directions. While it is observed that money supply innovations cause interest rates to decrease, a certain amount of evidence is presented suggesting that velocity innovations are responsible for interest rate increases. However, both money supply and velocity innovations lead to higher prices and higher output.

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    Paper provided by EconWPA in its series Macroeconomics with number 9802001.

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    Length: 33 pages
    Date of creation: 03 Feb 1998
    Date of revision:
    Handle: RePEc:wpa:wuwpma:9802001
    Note: Type of Document - WordPerfect; prepared on IBM PC; to print on HP; pages: 33 ; figures: included. The opinions expressed in this paper are those of the author and do not necessarily represent the views of the Italian Ministry of the Treasury. Thanks to Behzad Diba for suggestions. Earlier versions of the paper have benefited of comments from Matthew Canzoneri and Robert Cumby. Any errors are mine.
    Contact details of provider: Web page: http://128.118.178.162

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    1. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    2. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    3. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
    4. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
    5. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
    6. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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