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An algorithm for estimating the volatility of the velocity of money

By Murat Alikhanov and Leon Taylor


Most macroeconomic models, such as the IS-LM, assume equilibrium in money markets. Since money demand is an inverse function of velocity, an inaccurate estimate of velocity will lead to errors in calculating the monetary and general equilibria. This note suggests a way to gauge the potential error in estimating velocity. The algorithm arises from the quantity equation of exchange, which one may prefer to an ad hoc model of velocity.

Topics: E47 - Forecasting and Simulation: Models and Applications, E52 - Monetary Policy, E58 - Central Banks and Their Policies
Year: 2013
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