Abstract

Portfolio Structure of Commercial Banks and the Velocity of the Circulation of Money The Empirical Findings for the Federal Republic of Germany

Nowadays the quantity of money serves predominantly as an intermediate objective magnitude for monetary policy. Other potential intermediate objective magnitudes such as the volume of bank credit, however, are given only marginal consideration, although it has often been asserted that that portion of the money supply which is put into circulation in the course of granting bank credits influences economic activity far more than the portion deriving from, say, sales of securities by banks. The extent to which the portfolio structure of the banking sector actually influences the development of production and inome is investigated statistically with a simple model approach. The question is examined of whether the velocity of circulation increases when banks expand the credits granted in proportion to their security holdings, and whether it decreases when the portfolio structure is shifted in favour of security holdings. A study based on the period from 1968 to 1980 shows that the manner in which money is brought into circulation is by no means insignificant for the course of economic activity. True, the intensity of the impact of the portfolio structure effect appears to vary considerably over time. But at latest from the second third of the nineteen-seventies onwards, the relationship between the changes in portfolio structure and those in the velocity of circulation are so marked, that in the future a rational monetary policy will hardly be able to get along without paying more attention than hitherto to the assets side of bank balance sheets.