FEDERAL RESERVE BANK OF ST. LOUIS
Ratios of GNP/M1 and NYSE/GNP
A ~ / \ G N P / M i $ s c A t r
C Ill 1926
2 N Y S E s a /‘ At l e s / G N P s c . A m r l L — ~ - - -
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
demand suggests consumption de- or wealth, rather
income. Analogously, rnor-e closely related
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
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.
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-—
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).