Comments on Gordon, Leeper, and Zha’s “Trends in Velocity and Policy Expectations”

Abstract

I argue that low-frequency movements in U.S. base velocity are well explained by standard models of money demand. The model of Gordon, Leeper, and Zha is not standard because they assume a very high interest elasticity. The positive conclusion that they reach about the model’s ability to mimic movements in velocity necessarily implies that predicted movements in interest rates are too smooth.

---