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FEDERAL RESERVE BANK OF ST. LOUIS

AUGUST/SEPTEMBER 1987

chart o

Ratios of GNP/M1 and NYSE/GNP

~et~

  • Annu& Data

Ratio 1.50

A

1.25

--------------

‘1

6

1.00

4’L

I

L

.75

11~ 1117

1

A éA—

A ~ / \ G N P / M i $ s c A t r

.

A~

L

_

_

~

H’r

38

42

4

46

50

1

_

34

Ill

C Ill 1926

30

54

2 N Y S E s a /‘ At l e s / G N P s c . A m r l L ~ - - -

F 11,11,111,1

58

62

66

tlt

10

‘~N

__

111.111

74

~

78

J~

III

82

II!

.50

I

/

.25

.00 1986

about 10 percent since 1981, somewhat below its 12

rrteasure of ‘‘permanent income’’ or u’ealth. The per’—

percent annual gr-owth rate fn’om 1970 to 1981. if this measure accurately represents total financial transac-

tions, its velocity movement does not support the vtew

that the velocity problem resulted from a shift fi-om non-financial transactions to financial transactions.

manent incorlie that individuals cisions on their- than on cur-rent money may’ be

theor

of consumer

primarily

base

their

permanent

incorire

demand suggests consumption de- or wealth, rather

income. Analogously, rnor-e closely related

the to

demand for permanent

A somewhat different way to assess whether a tise in financial transactions produced the fall in velocity is

shown in chart 6; it compares the movement of veloc- ity with that of the annual ratio of the value of shares

income or theor-elical

wealth.’ Panel A in figure 1 illustrates the r-elationship between permanent income

arid

measured

income

during

cyclical

fluctuations.

If

the demand for monr-w depends upon pet-manent income, it will fluctuate less than will current incorire

sold on the New York Stock Exchange (NYSEI to GNP

since 1926.” While the ratio of NYSE sales to GNP has risen somewhat during the 1980s, there has been no

consistent relationship between this ratio and velocity over the past 60 year’s.

over rise

the business cycle. Thus, measured (fall) as measured income increases

velocity will )decreases~

r-elative to permanent income because the amount of money held will change less than tneasured income.

GNP Vs. Wealth

Chan’t 7 displays both the usual velocity nleasw-e and one based on permanent income estimates.”

Another potential specification problem arises from

Once again, it does not appear that the velocity de- cline in the l9SOs is explained by movements in cur-—

the

use

of GNP

to

calculate

velocit

instead

of using

a

loll has been argued that the recent decline in velocity can be

IlFor example, see Friedman and Schwartz (1982, p. 38).

explained by the rise in stock market transactions, see Morgan Guarantee (1986).

“The measure of permanent income used here was suggested by Darby (1972).

11

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