The Stochastic Properties of Velocity: A New Interpretation
Michael D. Bordo, Lars Jonung
NBER Working Paper No. 2255 (Also Reprint No. r1032)
A number of recent studies have concluded that velocity for the United States for the past century displays the characteristics of a random walk without drift. In this study, we confirm this result for four other countries for which we have over a century of data -- Canada, the United Kingdom, Sweden and Norway. One implication of a random walk is that past changes in velocity cannot be used to predict future changes. However, this does not mean that past changes in variables that economic theory deems important determinants of velocity cannot be used to predict future changes. In this study we find that past changes in the traditional determinants of velocity - permanent income and interest rates, as well as a number of institutional variables, can be used to predict future changes in velocity.
Published: Bordo, Michael D. and Lars Jonung. "The Stochastic Properties of Velocity: Evidence for Five Countries." The Long-run Behavior of the Velocity of Circulation, ed. by Michael Bordo and Lars Jonung, pp. 135-148. New York: Cambridge University Press, 1987.