Interpretation of a Regularity in the Behavior of M2

Dan Larkins and

DL

Dan Larkins American Enterprise Institute

William Fellner

WF

William Fellner American Enterprise Institute

THE OBJECTIVE of this paper is to fit the horizontal trend in “M2 velocity,” observed for about a decade and a half, into a somewhat broader frameworkin which the regularity falls in place. The behavior of income velocity—or of its reciprocal, which expresses money holdings per unit of income—is important because it discloses the money demand corresponding to alternative levels of money income. Appraising this relationship is necessary to devising a rational macro policy.