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Money Velocity with Interest Rate Stochastic Volatility and Exact Aggregation

  • William A. Barnett

    (Washington University in St. Louis)

  • Haiyang Xu

    (Washington University in St. Louis)

The determinants of money velocity are explored under various assumptions on interest rate uncertainty in a monetary general equilibrium model. It is found that the appearance of velocity function instability can be produced by overlooking interest rate stochastic volatility. In addition, when interest rates are subject to stochastic volatility, velocity is found to follow a nonlinear stochastic process. We conclude that the variances of interest rate stochastic processes are omitted variables in many studies of velocity function behavior.

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Paper provided by EconWPA in its series Macroeconomics with number 9803004.

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Length: 22 pages
Date of creation: 04 Mar 1998
Date of revision:
Handle: RePEc:wpa:wuwpma:9803004
Note: Type of Document - Microsoft Word; prepared on IBM PC; pages: 22 ; figures: 2 Excel Figures Included. A revised version of this paper, with the modified title, "Stochastic Volatility in Interest Rates and Nonlinearity in Velocity," is forthcoming in a special edition of the International Journal of Systems Science
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  1. James B. Bullard, 1994. "Measures of money and the quantity theory," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 19-30.
  2. Barnett, William A & Fisher, Douglas & Serletis, Apostolos, 1992. "Consumer Theory and the Demand for Money," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 2086-2119, December.
  3. Alberto Giovannini & Pamela Labadie, 1989. "Asset Prices and Interest Rates in Cash-In-Advance Models," NBER Working Papers 3109, National Bureau of Economic Research, Inc.
  4. P.A.V.B. Swamy & P.A. Tinsley, 1976. "Linear prediction and estimation methods for regression models with stationary stochastic coefficients," Special Studies Papers 78, Board of Governors of the Federal Reserve System (U.S.).
  5. Michael T. Belongia, 1984. "Money growth variability and GNP," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 23-31.
  6. Labadie, Pamela, 1989. "Stochastic inflation and the equity premium," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 277-298, September.
  7. Belongia, Michael T, 1996. "Measurement Matters: Recent Results from Monetary Economics Reexamined," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1065-83, October.
  8. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
  9. Fisher, Douglas & Serletis, Apostolos, 1989. "Velocity and the growth of money in the United States, 1970-1985," Journal of Macroeconomics, Elsevier, vol. 11(3), pages 323-332.
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