Instability of the Velocity of Money: A New Approach Based on the Evolutionary Spectrum

Money demand instability has been the subject of considerable attention in the recent literature. This paper examines the stability of velocity series for the United States and for five European countries (France, Germany, Italy, the Netherlands and the United Kingdom). A distribution-free test due to Subba Rao (1981) and based on the concept of the evolutionary spectrum is used. The test does not require the assumption that distributions are Gaussian and is able to decompose (by frequency) the sources of instability. The technique reveals structural breaks of long-term significance for only broad money velocity in the United States and narrow money velocity in the United Kingdom.