Academic journal article American Economist

M1 Velocity and Interest Rates: A Reply

Academic journal article American Economist

M1 Velocity and Interest Rates: A Reply

Article excerpt

Two questions have been raised concerning my paper "Velocity and the Variability of Yields on Financial and Other Assets" published in the Spring 1995 issue of The American Economist: (1) Why do other studies, such as Garner (1986) and Falls and Zangereh (1989) arrive at different conclusions about the relationship between V 1 and interest rate instability? (2) Why, in Payne's analysis, does interest rate variability Granger cause V1 in the full analysis period (1960-1990), but not in the most recent subperiod (1982-1990)?

In response to the first question, the time frame and methodology of my paper is totally different from the studies cited. I agree with the author's suggestion of possible substitution effects inherent in M1 as well as with non-M1 components of M2. In response to the second question, the work of Jean Gauger in the May 1992 issue of the Journal of Money, Credit, and Banking provides empirical evidence contrary to the "M1 problem" associated with the post-1980 period. The comment states:

"This 'M1 problem' is more significant in respect to the post 1980 period since the variability of interaggregate deposit substitution (IDS) has increased. A simple way to measure IDS is to use the ratio of NM1M3 to MI. From 1960.1 to 1979.3, the changes in this ratio had a standard deviation of .0207, while the standard deviation for the 1979.4 to 1990. …

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