Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100798
Authors: 
Gordon, David B.
Leeper, Eric M.
Zha, Tao
Year of Publication: 
1997
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 97-7
Abstract: 
U.S. velocity of base money exhibits three distinct trends since 1950. After rising steadily for thirty years, it flattens out in the 1980s and falls substantially in the 1990s. This paper explores whether the observed secular movements in velocity can be accounted for exclusively by endogenous responses to changing expectations about monetary and fiscal policy. We use a model with two key features: a substitute for money in transactions and an array of assets that includes money, nominal bonds, and physical capital. The model maps policy expectations into portfolio decisions, making equilibrium velocity a function of expected future money growth, tax rates, and government spending. When expectations are estimated using Bayesian updating, simulated velocity matches the trends in actual velocity surprisingly well.
Subjects: 
Macroeconomics
Money supply
Monetary policy
Velocity of money
Document Type: 
Working Paper

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