Money and Velocity During Financial Crises: From the Great Depression to the Great Recession
57 Pages Posted: 17 Aug 2015
Date Written: 2015-05-01
This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from financial reform.
Keywords: Money demand, Financial crises, Monetary policy, Liquidity, Financial innovation
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