The relative stability of monetary velocity and the investment multiplier: a replication of the Friedman-Meiselman study

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Virginia Tech


In tests performed for the period 1897 to 1958, Milton Friedman and David Meiselman found that income velocity of circulation of money was consistently more stable than the investment multiplier except during the early years of the Great Depression. This paper replicates their test for the period 1959 to 1986. The results for this later period are consistent with the Friedman-Meiselman findings.

The stock of money remains the more stable and consistent influence on consumption; autonomous expenditures do not influence consumption during any sub-period studied. The money stock remains far more critical than autonomous expenditures in explaining movements in consumption.

The replication consists of a series of regression equations for consumption expenditures as a function of the stock of money and of autonomous expenditures. Data in both nominal and real terms are used. Data are lagged five quarters to test the effect on consumption.