Velocity and interest rate variability in Italy: a further test of the Friedman hypothesis

Abstract

This paper examines whether interest rate variability leads to a decrease in the velocity of money in Italy. The hypothesis is tested using the Johansen cointegration technique and error–correction modelling. The empirical findings lend support to the Friedman hypothesis and help reconcile the mixed results of others regarding the hypothesis in Italy. The error–correction model results are consistent with risk–averse households holding more money, and thus reducing velocity, when faced with the uncertainty associated with interest rate variability.