Money and velocity during financial crises: From the great depression to the great recession
Journal of Economic Dynamics and Control
This study models the demand for a broad monetary aggregate (M2) from the Great Depression through the Great Recession. Key to the model is the interaction between a measure of time-variation in economic agents’ perceived financial risk and an index of the cost of portfolio adjustment. The finding of a useful money demand relationship suggests that skepticism regarding the indicator role of a broad, liquid money aggregate as a policy guide may be exaggerated. Further, our model provides some guidance for policymakers who face the challenge of unwinding large balance sheets as risk premia return to normal and velocity adjusts.
Anderson, Richard G.; Bordo, Michael; and Duca, John V., "Money and velocity during financial crises: From the great depression to the great recession" (2017). Faculty Scholarship. 106.