Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228910
Authors: 
Benati, Luca
Year of Publication: 
2020
Series/Report no.: 
Discussion Papers No. 20-22
Abstract: 
M1 velocity is, approximately, the permanent component of the short-term rate. This implies that agents-in deciding how much wealth to allocate to non interest bearing M1, as opposed to interest-bearing assets-almost uniquely react to permanent shocks to the opportunity cost, essentially ignoring transitory shocks. This suggests that money-demand models must be modified to allow for such distinct reaction to permanent and transitory variation in the opportunity cost of holding M1. Under monetary regimes making inflation stationary, permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest.
Subjects: 
Money demand
unit roots
cointegration
structural VARs
natural rate of interest
JEL: 
E30
E32
Document Type: 
Working Paper

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