Uncovering the Goodhart's Law: Theory and Evidence

Abstract

This paper addresses the Goodhart's Law in a cash-in-advance economy with monetary policy regime switching. Using the Japanese data of the money velocity, we found that although our cash-credit model fails to generate a downward trend in the actual velocity, the model succeeds in terms of velocity's variation and correlations with money growth rates or nominal interest rates, with procyclicality of velocity unpredictable.Goodhart' Law; velocity of money; Taylor rule; Markov regime swiching; cash-credit model