Academic journal article Atlantic Economic Journal

Velocity and Money Growth Variability: Evidence from Japan

Academic journal article Atlantic Economic Journal

Velocity and Money Growth Variability: Evidence from Japan

Article excerpt

A number of studies have been done investigating the behavior of the velocity of money both in the U.S. and U.K. during the early 1980s. The apparent end to the constant trend of velocity has called into question the stability of the demand for money function and may seriously undermine the monetarist position.

Milton Friedman |AER, 1984~ attributes the decline in velocity to the extreme volatility of money growth at the beginning of the 1980s. This volatility created uncertainty with regard to economic variables and increased the demand for real money balances, a contributing factor to the decline in GNP. This hypothesis is supported by Hall and Noble |Journal of Money and Banking, 1987~, who provided empirical evidence using U.S. data that the variability of money, as measured by the standard deviation of money growth, causes velocity in the Granger sense. If this monetarist position is accepted, the case for a monetarist rule is strengthened.

This note investigates the robustness of the Friedman hypothesis that states the volatility of money growth influences the velocity of money by using data for Japan for the period 1975-87. The Granger-causality method is implemented to test for the effect of the variability of the Japanese monetary aggregate M2 + CDs on velocity. The regression estimates support the Friedman hypothesis.

The Granger-causality method involves estimating an equation of the following form:

|Mathematical Expression Omitted~,

where GVEL is the quarterly growth of velocity of money and SDM is a measure of the variability of money growth. …

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