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FEDERAL RESERVE BANK OF ST. LOUIS

impact on output and prices than previously.” Specifi- cally, then’e maybe extended pen-iods when significant incr-eases in Ml produce little or no associated growth in spending or- inflation; on these occasions, velocity would decline substantially.” Moreover, if the savings portion of Ml is related to GNP differently than its

“From another perspective, the growth rate of old M2 velocity had a trend growth rate of zero; see Ott (1982). Some have argued that new Ml is close to old M2 old Ml plus time and savings deposits,

so perhaps the trend growth rate of its velocity, too, will be about zero. While the period since 1981 is too short to establish a trend,

the growth rate of the new Ml velocity over this period has been about —2.4 percent.

“While the experimental monetary aggregates should reduce or

eliminate such problems, this does not seem to be the case. See Batten and Thornton (1985, pp. 32—33) for a discussion of this point.

AUGUST/SEPTEMBER 1987

transaction components, the relationship between

the growth n’ates of Ml and GNP may be permanently altered.

These savings balances appear only in the “other

checkable deposits”

(00)1 component of Ml. Thus,

the validity of this explanation can be examined by comparing the behavior of velocity measures using

MM (which consists of curnency and non-interest- h e a r i n g c h e c k a b l e d e p o s i t s i O r c that of the Ml velocity measure during the lYSOs. By u r r e n c y a l o n e w i t h

increasing the cost of holding currency and demand deposits, the intn-oduction of interest-bearing checka-

ble deposits 1NOWs and Super NOWsI should have induced a relative shift fiom demand deposits and currency into these new accounts; this, in turn,

should produce a significant rise in currency and MM velocity measures. Once individuals’ portfolios are

15

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