Friday, October 2, 2009

Velocity, oil and money

The issue of Whodunnit, specifically did the Fed have tight money. Beckworth discusses it, and the Everyday Economist kicks in. Can we tell from money velocity if there was an error in Fed policy.

Here is my problem with the velocity issue. On July, 2008 oil crashed. The change in money velocity occurred in late Aug 2008, about a month later or coincident. So, yes, the velocity of money changed, but the velocity of oil changed a month earlier. We would expect the velocity of money to change if the velocity of oil deliveries suddenly collapsed. The Fed acted by early September, 2008; oil cashed to the bottom and the ten year yield followed.

Beckworth's VAR study and Hamilton's VAR study disagree. But look at the miles driven chart, showing a drop in personal transportation since Jan 2008, before the monetary velocity shock.

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