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August/September 1987, 
Vol. 69, No. 7
Posted 1987-08-01

Solving the 1980s' Velocity Puzzle: A Progress Report

by Courtenay C. Stone and Daniel L. Thornton

Courtenay C. Stone and Daniel L. Thornton evaluate the validity of the major theories about velocity’s puzzling behavior in recent years. After grouping the various theories into three categories—misspecification, structural shifts and cyclical factors—the authors show that, with the possible exception of one variant of the financial innovations explanation, no single theory successfully solves the velocity puzzle. Moreover, while certain explanations in tandem appear to offer some insight into velocity’s behavior, they, too, prove insufficient to solve the complete puzzle.