Money Market Rate Variability And The Velocity Of Money: Some International Evidence

Abstract

This paper re-examines the Friedman hypothesis that uncertainty about the future course of money supply growth influences velocity by focusing on the relationship between interest rate variability and the income velocity of money in nine industrialized countries. As an indicator of the stance of monetary policy, we use the money market rate. Cointegration and error-correction modeling techniques are used to test the hypothesis that the variability of the money market rate impacts velocity. Eight of the nine countries studied exhibit a statistical relationship between the variability of the money market rate and the income velocity of money.