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FEDERAL RESERVE BANK OF ST. LOUIS

Appendix

‘ro examine whether velocity has become more interest sensitive in the 1980s, the growth rate of Ml velocity was

regressed on distnhuted lags of its own past growth rate and changes in the three-month Treasury bill rate for three alternative periods from 1/1960 to 11/1987. The results ar-c

presented in table 1. ‘t’he lag length was determined sepa- rately for each period using the final prediction error crite-

rion; see Thornton and Batten 1985). The maximum lag length considered was 12 for the two longer periods and four for the shorter’ one. The pre-1980 results indicate that neither its own past growth nor that of short-term interest rates significantly influenced Ml velocity growth. The lag lengths selected were zero for velocity growth and the contemporaneous and first lag for the change in the Trea- sury bill i-ate. However, even though the lag coefficient on the change in the T-hill rate is both positive as expected and statistically significant at the S percent level, the hypothesis that the contemporaneous and lag coefficients are jointly insignificant cannot be rejected at the S percent level.

A considerably different result emerges when the r-egres-

AUGUST/SEPTEMBER 1987

sion is extended to include the 1980s. The lag-length selec- tion piocedure now chose a sixth-order lag for’ velocity gi-owth and a fourth-order lag for the change in the T-bill

rate. Moreover, the hypothesis that these coefficients are jointly insignificant is rejected at the 5 percent level; con-

temporaneous and past changes in the Treasury bill rate exert a significant influence on current Ml velocity growth.

When the equation is estimated only for the period of the 1980s, there is again evidence of a statistically significant

effect of interest rates on Ml velocity. Indeed, the sum of the distributed lag coefficients on the Treasury-bill i-ate is posi-

tive and significant, indicating a longer-run positive rela- tionship between Ml velocity and interest rates that does

not appear to have existed in the prior’ period. Hence, these results are consistent with the hypothesis that the interest

sensitivity of Ml balances changed significantly following the monetary deregulation and financial innovations of the

1980s. It will take more research, however, to determine how much of the velocity puzzle can be attributed to this factor.

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