Velocity instability in the USA: a monetary or real phenomenon?

Abstract

Using a vector autoregressive framework, this paper examines the role of real and monetary factors in explaining velocity instability in the sample periods 1973:1–1993:2 and 1979:4–1993:2. The VAR model includes money growth variability, velocity, the interest rate and real output. On the basis of variance decompositions for both sample periods, there is little support for Friedman's monetary uncertainty hypothesis. Movements in velocity are governed more by interest rate and real output changes.