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Please use this identifier to cite or link to this item: http://hdl.handle.net/10400.5/2578

Title: The Expenditure Composition Hypothesis: Empirical Evidence and Implications for Monetary policy
Authors: Barros, Carlos Pestana
Gil-Alana, Luis
Leão, Pedro
Keywords: Velocity of money
monetary policy
business cycle
Issue Date: 2007
Publisher: ISEG – Departamento de Economia
Citation: Barros, Carlos Pestana, Luis Gil-Alana e Pedro Leão. 2007. "The Expenditure Composition Hypothesis: Empirical Evidence and Implications for Monetary policy". Instituto Superior de Economia e Gestão - DE Working papers nº 10-2007/DE/UECE
Series/Report no.: DE Working papers;nº 10-2007/DE/UECE
Abstract: Leão (2005) has recently proposed a new explanation for the short run variability of the velocity of money based on the changes in the composition of the expenditure that occur along the business cycle. This paper presents further empirical evidence in favour of Leao's Expenditure Composition Hypothesis, and draws new implications of this hypothesis for monetary policy. We use a VAR model to analyze the determinants of the velocity of both Ml and M3 in the USA. The main conclusion is that increases in the weight of investment and durable consumption in total expenditure raise the velocity of both narow and broad money. This is in line with the Expenditure Composition Hypothesis. Furthermore, we draw a new implication of this hypothesis for monetary policy. The more a central bank's decisions on the interest rate respond to money growth, the more volatile economic growth will be. In other words, a monetary policy strategy -like that of the ECB - which puts emphasis on money growth is de-stabilizing.
URI: http://hdl.handle.net/10400.5/2578
ISSN: 0874-4548
Publisher version: https://aquila1.iseg.utl.pt/aquila/getFile.do?method=getFile&fileId=26481
Appears in Collections:UECE - Documentos de Trabalho / UECE - Working Papers
DE - Documentos de trabalho / Working Papers

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