Academic journal article Atlantic Economic Journal

M1 Velocity and the Recognition Lag

Academic journal article Atlantic Economic Journal

M1 Velocity and the Recognition Lag

Article excerpt

The ability to predict same-quarter changes in V1 provides contemporaneous predictions of changes in nominal GDP. This can help reduce the recognition lag since most of the monetary data necessary for such predictions are available with just a two-week time lag. The informational value of the model can be enhanced to the extent these data can be accurately forecast.

Accurate predictions of V1 changes can be generated by a model utilizing just four variables. The two basic variables, which can explain over 85 percent of V1 variation since 1986, recognize that instability in Ml portfolio demand can affect V1 in just two ways. First, M1 balances can be shifted to other bank deposits, (NM1M3) or vice versa, thereby increasing (or decreasing) the NM1M3 to M1 ratio (M1SUB). Second, M1 balances can be shifted to nonbank assets, or vice versa, thereby increasing (or decreasing) the ratio of nonbank credit to bank credit (NBCR/BCR). This ratio is estimated as (total debt - M3)/M3. Any increase in this ratio (e.g., an increase in securitization of bank debt) is positively related to V1, since higher levels of credit spending raise GDP without a commensurate increase in the money supply [Stauffer, International Advances in Economic Research, February, 1996].

The third variable, total debt, is included to adjust for the magnitude of debt changes since NBCR/BCR measures only the supply composition of all debt. …

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