No. 264 - Stock Prices and Money Velocity: A Multi-Country Analysis

What kind of information do stock prices offer for predicting velocity? This paper develops previous work by Milton Friedman for the US economy and shows that a wealth effect derived from the stock market has negatively influenced the ratio of nominal income to a broad definition of money in a panel of 25 countries. Taking quarterly data for the last three decades, the relationship holds in Japan, the United Kingdom and Switzerland; in Italy, a substitution effect (away from money) has also been operating. Overall, these findings suggest that close attention should be paid to the repercussions of asset inflation and deflation on the behavior of monetary aggregates.