Money velocity and the natural rate of interest

Arbeitspapier

Since World War I, M1 velocity has been, to a close approximation, the permanent component of the short-term nominal rate. This logically implies that, under monetary regimes which cause inflation to be I(0), permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest. Evidence from the Euro area and several inflation-targeting countries is compatible with this notion, with velocity fluctuations being systematically strongly correlated with a Stock and Watson (1996, 1998) estimate of trend real GDP growth. I exploit this insight to estimate the natural rate of interest for the United Kingdom and Canada under inflation targeting: In either country, the natural rate has been consistently declining since the early 1990s.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Papers ; No. 17-06

Classification and Topics

• Classification: Wirtschaft
• Subject: Money demand ; Lucas critique ; structural VARs ; unit roots ; cointegration ; long-run restrictions: natural rate of interest

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Benati, Luca
• Event: Veröffentlichung
• (who): University of Bern, Department of Economics
• (where): Bern
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/204906
• Last update: 10.03.2025, 11:44 AM CET