VELOCITY VARIABILITY - DIRECTLY AN INTEREST-RATE DRIVEN PHENOMENON

Unexpected declines in the United States M1 income velocity of money d uring the 1980s has received considerable attention. Some analysts arg ue that since the instability of velocity occurred in tandem with a '' monetarist policy experiment'' by the Federal Reserve, the fallacy of monetarists' policy prescriptions is now clear for all to see. Monetar ists demure, arguing that the Federal Reserve never really conducted a test of monetarist policy doctrine. Rather the Federal Reserve by cre ating so much variability in money growth caused the velocity's dramat ic declines. Hall and Noble (1987) provide evidence to support the mon etarist position while Brocato and Smith (1989) offer evidence that su pports the anti-monetarist view. We employ bi-variate and multi-variat e tests of Granger causality to re-examine the issues. Of the variable s considered-i.e., money growth variability, the money stock, the inte rest rate, real GAP, and the GNP implicit price deflator, the interest rate wins hands-down. That is, the interest rate Granger causes the M 1 income velocity of money for all samples that include some 1980s dat a. Nonetheless, the monetarist response may still be accurate, since m oney growth uncertainty helps to explain the movements in the interest rate during most of the 1980s.