The velocity of US M2 in the 1990s: some further evidence

This paper investigates the behaviour of M2 velocity in recent years with special emphasis on the post-1989 period. Unlike previous studies in this area, M2 velocity is analysed in the context of a small vector autoregressive (VAR) model which includes income, prices, interest rates, and money growth volatility. The hypothesis of a structural shift in M2 velocity associated with the post-1989 period is rejected by the VAR model. This suggests that the unusual behaviour of M2 velocity since 1989 may be traced to the variability in its determinants, rather than to a shift in the process generating velocity. Variance decompositions indicate that real income and the short-term opportunity cost of M2 are the most important determinants of M2 velocity. The long-term opportunity cost of M2 and the return on equities also have significant impacts on M2 velocity