Demand for Money: An Analysis of the Long-run

The income velocity of money -- an inverse measure of the demand for money balances -- is the ratio of the money value of income to the average money stock that the public (excluding banks) holds in a given period. Why the magnitude of that ratio has changed over time is the subject of Michael D. Bordo and Lars Jonung's classic study, originally published as The Long-Run Behavior of the Velocity of Circulation. Supported by statistical data, econometric estimation techniques, and meticulous historical analysis, this work describes, in an international setting, how slow-moving economic, social, and political forces interact with the decisions households and firms make about how much money to hold.Annual time series of velocity for several countries from the late nineteenth century to the late twentieth century display a U-shaped pattern. Existing theories can explain each section of the velocity curve -- the falling, flat, and rising parts -- but the overall pattern is not consistent with any one theory. Here the authors put forth a comprehensive explanation for this behavior over time. Their theory is largely an extension of the approach of Knut Wicksell, the Swedish economist who stressed the role of substitution between monetary assets. This approach, which emphasizes institutional variables, is incorporated into the arguments for the traditional long-run money demand (velocity) function. Four types of empirical evidence strongly support the authors' theory: econometric studies of the long-run velocity function for several countries; a cross section study of approximately eighty countries in the postwar period; a case study of the Swedish monetization process in the fifty yearsbefore World War I; and an examination of the time series properties of velocity.Demand for Money suggests that institutional factors, as opposed to real income, play a greater role in velocity than previously thought. And t

Michael D. Bordo is professor of economics and director of the Center for Monetary and Financial History at Rutgers University.

Introduction to the Transaction Edition	p. ix
Foreword	p. xxi
Preface	p. xxv
Introduction	p. 1
Purpose of the study	p. 1
Plan of the study	p. 2
Evidence and theories of the long-run behavior of velocity	p. 4
The secular picture	p. 4
Theories of the long-run behavior of velocity	p. 12
Explanations stressing the role of money as an asset	p. 13
Explanations stressing the role of money as a medium of exchange	p. 19
The stochastic properties of velocity	p. 20
The institutional approach	p. 22
The institutional explanation	p. 22
Knut Wicksell on the growth of banking and the velocity of hard cash	p. 24
The institutional approach: The long-run econometric evidence	p. 29
Measures of institutional developments across countries	p. 29
The econometric evidence	p. 32
The evidence from pooled time series regressions	p. 42
Results for the full period	p. 43
A comparison between periods of rising and falling velocity	p. 48
A comparison of the gold standard and managed money periods	p. 50
Conclusions	p. 51
Appendix A	p. 53
Appendix B	p. 59
Appendix C	p. 65
Monetization and the behavior of velocity in Sweden, 1871-1913	p. 78
Introduction	p. 78
The behavior of velocity	p. 79
The process of monetization	p. 80
The rise of commercial banking	p. 80
Changes in wage contracts and labor markets	p. 83
Changes in market arrangements	p. 88
The influence of real income and interest rates	p. 90
The growth in real income	p. 90
Fluctuations in interest rates	p. 92
Empirical results	p. 94
The global evidence since the 1950s	p. 98
Introduction	p. 98
Patterns expected	p. 99
Empirical results	p. 101
Comparisons with other studies	p. 118
Summary	p. 119
Appendix A	p. 120
The stochastic properties of velocity: Evidence for five countries	p. 135
Introduction	p. 135
Is velocity a random walk?	p. 136
Are changes in velocity predictable?	p. 142
Conclusions	p. 148
Conclusions and implications	p. 149
Major conclusions	p. 149
Implications	p. 152
Data sources	p. 154
Data sources for the velocity series in Chapter 2	p. 154
Data sources for the regressions in Chapter 4	p. 158
Data sources for the regressions in Chapter 4, Appendix B	p. 164
Data sources for the exchange rates used in converting permanent income into dollars for the pooled regressions in Chapter 4	p. 167
References	p. 168
Author Index	p. 177
Subject Index	p. 179
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Demand for Money: An Analysis of the Long-run Behavior of the Velocity of Circulation

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