The dynamics of money velocity

ABSTRACT

The dynamic of money velocity has changed gradually, influencing how macroeconomic shocks affect money velocity. This paper examines the response of money velocity to the external shocks in a system of equations, where money velocity, real output growth, money growth volatility, expected inflation, and risk premium are jointly determined. The regime-switching behaviour of money velocity is then examined through a Bayesian threshold approach. The main finding suggests that money velocity drops significantly after negative output and expected inflation shocks, followed by a sudden increase. In addition, the regime-switching process distinguishes the deterministic and stochastic behaviour of money velocity.

KEYWORDS:

• Hierarchical Bayesian estimation
• inflation expectation
• money growth
• risk premium
• velocity of money

JEL CLASSIFICATION:

• C11
• E42
• E51

Disclosure statement

No potential conflict of interest was reported by the author.