The Long-Run Behavior of Velocity: The Institutional Approach Revisited
Michael D. Bordo
In this paper we provide evidence using annual data for the period
1880 to 1986 that institutional variables are significant determinants of
velocity in the United States, United Kingdom, Canada, Sweden and Norway.
This evidence supplements our earlier findings (Bordo and Jonung, Cambridge
University Press, 1987) for annual data ending in the early 1970's. We
present eVidence that several proxies for institutional change in the
financial sector are significant determinants of the long-run velocity
function; that for the majority of countries the long-run velocity function
incorporating institutional determinants has not undergone significant
change over the last 10 to 15 years; and that out of sample forecasts over
the last 10 to 15 years based on our institutional hypothesis are superior
to those based on a benchmark long-run velocity function for a number of
countries. these results suggests that failure to account for
institutional change in the financial sector such as may be captured by our
proxy variables may well be one factor behind the recently documented
instability and decline in predictive power of short-run velocity models
incorporating dynamic adjustment and higher frequency data.
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