The relationship between velocity and interest rate in the cash in advance model
Please cite this item using this persistent URLhttp://hdl.handle.net/11693/15044
This thesis considers the long run relationship between velocity of money and nominal interest rate with the proposed Cash in Advance model. In the long run analysis, the steady state relationship between velocity and interest rate in CIA model is modeled as a regression. The regression results by using level data are found to be spurious which is caused by non-stationary series. In order to solve this problem, the first differences of the variables are used in the regression. When the drawbacks of using the first differences are taken into consideration, Fully Modified OLS is preferred as the estimation method to find the long run relationship. According to the estimation results, the welfare cost of inflation is found.