Stochastic volatility in interest rates and nonlinearity in velocity

In this study it is shown that money velocity in a monetary equilibrium model is deterministically nonlinear when there are no exogenous uncertainties. Under some conditions, the asymptotic motion of money velocity is chaotic. When interest rates are stochastic and money and income growth are uncertain, the dynamics of money velocity ave nonlinear and its coefficients are stochastic. We simulate the slope coefficient of the money velocity function and find that it is quite volatile. The Swamy and Tinsley (1980) random coefficient model is then estimated to compare the results with those from model simulation. It is found that the estimated stochastic slope coefficient has important similarity with the simulation results. The findings of this paper provide some useful information on the nature of the instability of money velocity.