Professional Documents
Culture Documents
CARIBBEAN
Author(s): Ramesh Ramsaran
Source: Social and Economic Studies, Vol. 41, No. 4, REGIONAL PROGRAMME OF MONETARY
STUDIES (DECEMBER 1992), pp. 205-223
Published by: Sir Arthur Lewis Institute of Social and Economic Studies, University of the West
Indies
Stable URL: http://www.jstor.org/stable/27865122 .
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Ramesh Ramsaran
There are many issues related to the demand formoney function which
remain far from settled. Changes in the financial and social environ
ment in recent years have put the performance of money demand
equations either in single form or as part of macro-economic models
under increasing scrutiny. Problems in identifying the function con
tinue to be a major scourge.1 Poor forecasting ability of the equations
has also reduced their importance for monetary policy purposes.
pp. 205?223
identityto read
(Eq. 4) M = kY
?
where k = and stands for average cash balances as a fraction of
exchange role was not the only function of money. Liquidity prefer
ence could be influenced by yields on alternative financial assets.
Once thiswas admitted there need not be a fixed relationship between
Velocity could change
themoney stockand thelevelof expenditure.
in response to expectation of future interest rates movements and
V = Y
M
where V = incomevelocityof circulation
Y = nominal incomeor output
M = themoney stock
' '
It is clear from this definition that any factor that affects relative
to ', and vice versa, can cause V to change. The aggregate position
of course reflectsthebehaviourof individualsandfirms.Factors that
induce economic units to hold less money tend to increase velocity,
In Table 1we present two series of the income velocity of money for
each of thefourcountriesfortheperiodcoveringroughlythelasttwo
decades. As the footnotes to the Table show, is based on the
narrow concept of themoney supply, while V2 is based on a broad
With respect to bothVI and V2, Trinidad and Tobago
definition.
experienced the highest average velocity with Jamaica in second
Tobago shows no clear trend. In the case of V2, however, the ratio
appears tohave declined since the early 1980s. With respect to Jamaica
there appears to be no clear trend either inVI or V2. In the case of
TABLE
1.
INCOME
THE
OF
VELOCITY
MONEY,
1969-1990
1969
11.60
4.00
F
3.54
9.49
8.99
3.43
n.a. 1971
^1970
3.489.97
8.50
3.08
8.92
2.77
3.16
?n.a.1972
10.86
9.13
3.10
9.27
3.23
n.a.
n.a. 9.62
2.95
8.09
2.60
8.07
1.55
5.27
2.79
? 1973
3.08
10.66
8.09
2.73
2.56
7.44
6.15
1.64
O?1974
9.73
4.13
3.34
3.24
8.56
2.121975
3.90
8.31 1976
9.79
3.32
2.74
2.46
9.12
5.83
12.70
9.32
7.67
2.92
3.12
7.46
14.602.047.57
2.02
O 1977
9.52
3.28
6.94
4.84
2.59g
1978
7.98
3.02
8.32
2.89
1.98
2.02
2.13
7.69
2.074.52
6.91g
8.17
1979
9.06
3.04
2.05
2.93
6.00
4.94
1.94
S1980
3.27
8.88
1.96
8.35
5.41
2.72
2.22
7.08
1981
3.29
10.62
8.94
3.16
5.39
7.16
1.77
2.13
1982
8.36
9.42
2.91
2.70
3.98
7.60
1.30
2.09
1983
2.45
9.23
2.59
8.191984
3.29
2.94
10.72
8.71
2.27
3.28
1.05
7.23
2.091.03
7.50
2.08
9.04
1985
2.14
10.66
3.20
2.85
1.02
2.03
7.349.27
1986
2.12
2.68
9.27
6.58
0.91
2.72
2.071987
10.00
2.10
2.63
8.65
3.09
6.58
1.09
2.071988
10.95
7.89
2.07
2.45
3.10
5.83
1.08
1.93
1989
2.12
11.18
2.48
8.79
6.22
1.26
3.34
1.96
11.36
1990P
2.30
2.79
10.08
6.34
1.88
n.a.
Jamaica
Trinidad
&
Guyana
Barbados
> VI
=the
ratio
of
GDP
[at
current
market
prices]
to
Ml
[currency
in
circulation
on
plus
bank
demand
deposits]
Computed
from
Source:
Financial
IMF.
International
Statistics.
publications
official
and
Various
Issues.
[at
[Ml
GDP
of
ratio
M2
V2
bank
plus
the
prices]
market
=
to
time
current
deposits].
and
savings
The
taken
is
to
annual
the
be
stock
figures.
quarter
of
end
money
average
^Tobago
p.
n.a. provisional
available
not
Year
-
V2
VI
2.912.028.94
10.14 2.846.88
2.00
5.51
COEFFICIENTS
OF
VARIATION
TABLE
2.
THE
AVERAGE
INCOME
MONEY
OF
VELOCITY
AND
THE
ASSOCIATED
1969-1990 1972-1990
1969-1990
1969-1990
Source:
from
Computed
Table
1.
- Period -
Countries
Trinidad
&
Tobago
Jamaica
Barbados
Guyana
1.27 0.93
0.96 0.83 0.83 0.72 0.86 1.64
D.W. D.W.
0.029
(t) (t)
Time -0.007 (0.008)-0.083
(0.011)-0.022
Time -0.003 (0.028) (0.030)-0.054
(0.005)-0.350 (0.053) (0.007)-0.134 (0.012)
TABLE
3(a).
REGRESSED
VI
ON
(t)
TIME TABLE
3(b).
ON
REGRESSED
V2TIME
(t)
1.950 8.639 1.934 3.369 3.065
Constant
Term
9.017 3.784
10.702 Term
Constant
1972-90
Period
1969-90 1972-901969-891969-901969-90
1969-89 1969-90 Period
&
Trinidad
Tobago Tobago
&
Trinidad
Country Barbados Jamaica Country Barbados Jamaica
Guyana Guyana
Barbados (1973-90)
VI was regressed on real per capita income, the expected rate of
inflation, the interest rate on ordinary savings deposits, the expected
rate of inflationand the ratio of demand deposits to currency in
circulation.The OLS resultis given inEq.(5). While
Eq.(5) InVI = 6.81?0.58 InPI?0.03 In INF
(2.87) (0.37) (0.03)
+ 0.08 In SR? 0.42.In NDC
(0.9) (0.20)
R2 = 0.65
D.W. = 2.32
F = 7.25
the selected variablesexplain 65 per cent of the variation inVI, only
the demand deposit/currency ratio appears to be significant. The
coefficient of the per capita income variables indicates an income
elasticityof velocityof less thanone. The negative sign signifiesan
inverse relationship with velocity. The inflation variable in this
instance has a positive sign, as is the case with the demand deposit/
currency variable. The positive sign associated with the savings rate
variable points in the expected direction. The ordinary savings rate
Guyana (1970-89)
The regression results for Guyana with VI as the dependent variable
are shown inEq.(7). The fourvariablesused thereexplain 95% of the
variation inV1. The dominant variable however, is per capita income
which had a positive signand showedan elasticityof almost two.The
ratevariablehad theexpectedsign,while theinflation
interest variable
came out with a negative one. The latter,however, was associated with
=
Eq.(8) InV2 ?15.49 + 2.13 InPI + 0.01 In INF = 0.20 IN SR
(3.72)(0.53) (0.03) (0.09)
+ 0.03 InNDC
(0.20)
R2 = 0.96
D.W. = 2.04
F = 85.60
Jamaica (1970-90)
In the case of Jamaica the regression was run with the same four
The combined explanatory power of the four variables was less, than
50%. The incomevariable had the largestcoefficientbut itwas still
below one. The positive sign indicated that velocity increased with
income, again contradicting theFriedman hypothesis, but supporting
the implicit inventory theory position. The inflation and interest rate
variables both came out with positive signs. The unexpected negative
Concluding Observations
remained fairly stable in the face of a decline inper capita income since
theearly 1970s.
While thepaper has raised a number of issues about thebehaviour
of velocity in theCommonwealthCaribbean, it is difficulttodraw
definitive conclusions. If one assumes as Friedman does, that the
ambiguous, since short term reactions may not be the same as in the
long term.
1. In circulation
Note: The annual figure is taken as an average of end of quarter balances.
Source: Computed from official publications.
Notes
2. See H. Visser, The Quantity ofMoney, Martin Robinson, London, 1974, p. 55.
3. In particular see W.J. Baumol, 'The Transactions Demand for Cash; An
6. See P.J. Drake, Money, Finance and Development, Martin Robertson, Oxford,
1980, p. 98.
7. Ibid.
8. See Ezekeil andAdekunle, op. cit. See also Baumol and Tobin, op. cit.
9. See D. Laidler, "The rate of Interestand theDemand forMoney ? Some
Empirical Evidence", Journal ofPolitical Economy, Vol. 74, Dec. 1966.