Milton Friedman on Economics: Selected Papers by Milton Friedman & Gary S. Becker

Author:Milton Friedman & Gary S. Becker [Friedman, Milton & Becker, Gary S.]
Language: eng
Format: epub
ISBN: 0226263495
Publisher: University of Chicago Press Journals
Published: 2013-07-27T04:00:00+00:00

CHART IL-Observed and computed measured velocity, reference-cycle patterns, 1870-1954.

NOTE: These are reference-cycle relatives computed in the course of the cyclical analysis of the data shown in Chart I (see A. F. Burns and W. C. Mitchell, Measuring Business Cycles [New York: National Bureau of Economic Research, 1946], pp. 197-202).

A satisfactory analysis of this residual element requires the use of monthly rather than annual data. Annual data are unduly crude for studying timing relationships. For example, the cyclical patterns of the observed money stock in Chart III, Panel A, reveal no average lead; yet our more detailed analysis of monthly money data establish such a lead, after adjustment for trend, beyond any reasonable doubt.

It may nevertheless be worth examining the residual element in the annual data as a first step. This residual element is approximated in Chart IV by the ratio of the observed measured velocity to computed measured velocity. This ratio varies very much less over the cycle than measured velocity itself, and hence the movements it measures tend to be concealed by the movements in velocity arising out of the discrepancy between measured and permanent income. Yet our analysis of the stock of money suggests that this residual element may play a critical cyclical role. Indeed, perhaps the major significance of our analysis of velocity is that it enables its to extract this residual element, to eliminate the largely spurious movements of velocity that have hitherto masked the economically significant movements.

For deep depressions, the residual element has a clearly marked cyclical pattern. During expansion, the residual element at first falls, then rises, reaching a trough in mid-expansion. During contractions, the behavior is harder to determine, because one cycle-the earliest, from 1870 to 1878-has a major influence on the pattern for all cycles and the figures for this cycle are highly dubious.' If this cycle is omitted, the pattern for contractions is a mild fall from peak to mid-contraction and a sharper fall thereafter.

The residual element varies much less, on the average, for mild depression cycles than for deep depression cycles. Such cyclical movement as it does show is similar to that for deep depression cycles during expansion and just the reverse of that for deep depression cycles during contraction. This residual element is the cyclical component in cash balances that cannot be explained simply by a movement along a univariate demand curve in response to a cyclical movement in permanent income. It is perhaps not surprising that this component should be so much larger for deep than for mild depression cycles. In the mild depression cycles, there is a relatively small cyclical movement in general, which presumably means that there are only relatively small movements in whatever other variables operate to produce a discrepancy between desired cash balances as judged from income alone and actual cash balances.

What are these other variables? The obvious candidates are measures of the return on other assets that could be held instead of money. One alternative to holding money is to hold securities; another, to hold physical goods.

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