FEDERAL RESERVE BANK OF ST. LOUIS
the 1980s and attempts to assess the credibility of each. Alone, none of these explanations can account for the behavior of Ml velocity. Perhaps, instead, ~sev- eral influences have combined to produce the anomalous velocity behavior that has puzzled many researchers.
If there are several influences at work, financial innovations and cyclical variations in measured in-
come seem to be among the best candidates. This combination works well in explaining the velocity
puzzle through the first quarter- of 1986. when com-
bined with cyclical variation in velocity induced by rapid money growth, it may explain the behavior of
velocity through last year. Another explanation that deserves further scrutiny is the possible increased interest sensitivity of Ml balances as a result of mone- tary innovations during the 1980s.
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