Velocity and the Variability of Money Growth: Evidence from Granger-Causality Tests: Comment

Abstract

In a recent issue of this Journal Hall and Noble (1987) employ the Grangercausality method to test Milton Friedman's (1970) hypothesis that money growth volatility is a causal factor in changes in velocity. The background of Hall and Noble's investigation is based on (1) the controversial marked decline in M 1 velocity in 1982; and (2) the apparent weakening of the money/nominal GNP linkage implicit in the velocity decline. This latter aspect of the drop in velocity would appear to undermine a basic plank of monetarism, and has been described by Robert Gordon (1983) as the demise of Friedman (1984) has countered this argument by relating the velocity decline, in part, to the unprecedented volatility of money growth following the Federal Reserve's 1979 shift to nonborrowed reserves targeting. Implicit in Friedman's reasoning is that general uncertainty regarding money growth enters as an important argument in the public's money demand function. Thus, Friedman explains, the 1982 velocity decline does not undermine monetarism. Rather, it reflects one aspect of general portfolio readjustment under conditions of extreme perceived monetary uncertainty and the Elnancial instability that characterized the period. Using quarterly data from 1963:I through 1984:II Hall and Noble Granger-test the Friedman hypothesis by estimating the following regression:

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