The Common Development of Institutional Change as Measured by Income Velocity: A Century of Evidence from Industrialized Countries

45 Pages Posted: 31 Jul 2007

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Lars Jonung

Lund University - Dept. of Economics

Date Written: June 1993

Abstract

Previous evidence, most recently by Bordo and Jonung (1990) and Silclos (1988b, 1991), has shown on a country-by-country basis that proxies for institutional change significantly improve our understanding of the long-run behaviour of velocity and. consequently, of the demand for money. If institutional change is a common development across industrialized countries it should have a common influence on velocity whereas the same need not be true for the other principal determinants of velocity such as income and interest rates. In statistical terms, this implies that the institutional change process should be cointegrated across countries but the conventional velocity determinants need not be. The purpose of this study is to extend the existing evidence to study common features in velocity, income, and interest rates, across countries. The countries considered are Canada, the U.S., the U.K.. Norway. and Sweden. We are relying on a sample of annual observations from 1870. The recently developed and refined techniques of testing for conintegration are used to study the common features in the series of interest. Briefly, the evidence suggests support for the view that there exists a unique long-run relationship in velocity but not in income and interest rates and that the common feature in velocity is more apparent after rather than before World War 11. However, before World War II, common features in velocity are more apparent for the U.S. and Canada. and separately, for Norway and Sweden. Finally. we find that only a model which includes institutional change proxies possesses a single common stochastic trend in the pooled time series. as well as long-run elasticities consistent with theoretical predictions. We argue that the evidence can only be understood in the context of common historical developments in the respective countries' financial systems.

Suggested Citation

Bordo, Michael D. and Siklos, Pierre L. and Jonung, Lars, The Common Development of Institutional Change as Measured by Income Velocity: A Century of Evidence from Industrialized Countries (June 1993). NBER Working Paper No. w4379. Available at SSRN: https://ssrn.com/abstract=484024

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

Lars Jonung

Lund University - Dept. of Economics ( email )

Box 7080
Lund, 22007
Sweden

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