Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach

34 Pages Posted: 15 Feb 2006

Date Written: September 1990

Abstract

This paper estimates forecasting models using annual data for the income velocity of money in the G-7 countries. The predictions are conditional upon the realized value of the long-term domestic government bond rate. Such conditional forecasts did not deteriorate over the period 1980-1988 as compared with the earlier postwar period. Velocity of M1 is found to be very interest-elastic in almost all countries; velocity of M2 less so. The specifications (based on Kalman filters and smoothers) point to a non-constant (stochastic) trend in velocity, hence questioning the assumptions required for the cointegration techniques used in other research on the demand for money.

JEL Classification: 311

Suggested Citation

Bomhoff, Eduard J., Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach (September 1990). Available at SSRN: https://ssrn.com/abstract=885001 or http://dx.doi.org/10.2139/ssrn.885001

Eduard J. Bomhoff (Contact Author)

Monash University Malaysia campus ( email )

Jalan Lagoon Selatan
Kuala Lumpur, Selangor 46150
Malaysia

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