The stability of velocity: a test for seasonal cointegration

This paper applies seasonal integration and cointegration tests to assess the non-stationary characteristics of velocity using 25 years of quarterly unadjusted New Zealand money and income data. Velocity is clearly non-stationary on the basis of the seasonal unit root tests and there is some evidence of a changing seasonal pattern. The non-stationarity of velocity is confirmed by the acceptance of the hypothesis of non-cointegration between money and income at both the zero and biannual frequency. On balance, the cointegration results indicate no long-run relationship between money and income. While not addressing the issue of direction of causation, these results could be interpreted as questioning the monetarist view that the stable relationship between money and income can be exploited so that important macroeconomic variables can be influenced by manipulating the money supply.