The Demand for Money and Velocity in Major OECD Countries

Abstract

In recent years the behaviour of the income velocity of money in major OECD economies has displayed considerable volatility for both narrow and broad monetary aggregates (Table 1). Velocity in a number of large OECD economies, for example, fell sharply in 1982. Most notably, declines in the income velocity of M1, M2 and M3 in the United States of 2.3, 4.9 and 5.9 per cent, respectively, were large by historical standards. Such movements in velocity may arise as a consequence of changes in money demand in two important ways: they may result from movements along the money demand function, as the normal implication of changes in its interest rate and inflation expectations arguments; and the money demand function itself may shift (money demand instability), leading to unpredictable changes in velocity. Velocity may also move as the mechanical result of policies by the authorities which alter the supply of money in the short run, while the private sector is able to adjust only with ...