Econometrica Vol. 16 No. 2 1948
The Short-Term Interest Rate and the Velocity of Circulation
Abstract
THE purpose of the article is to examine with data the idea that there is a close connection between the velocity of circulation of cash balances and the short-term rate of interest. This connection may be stated as follows: The marginal convenience of holding cash balances diminishes the greater the volume of cash held and will fall to a very low level if the volume continues to increase; the short-term rate of interest must reflect the marginal convenience of holding cash; otherwise, if it is higher than the marginal convenience, lending of cash will take place; if lower, cash will be acquired through the sale of short-term assets. The relation of the marginal convenience of holding cash to the velocity of circulation would seem to take the form of a J curve. The examination of selected data concerning cash balances held by large manufacturing companies and the short-term interest rate in the United States during 1919 to 1940 seem to bear out this relationship to a fair degree.
- DOI
- 10.2307/1907232
- Volume
- 16
- Issue
- 2
- Pages
- 185
- Sources
- openalex crossref