Velocity in the long run : money and structural transformation
Abstract
Monetary velocity declines as economies grow. We demonstrate that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 102 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not ‘always and everywhere a monetary phenomenon’: the composition of output also influences money demand and hence the secular trends of price levels.
Citation
Mele , A & Stefanski , R 2019 , ' Velocity in the long run : money and structural transformation ' , Review of Economic Dynamics , vol. 31 , pp. 393-410 . https://doi.org/10.1016/j.red.2018.09.004
Publication
Review of Economic Dynamics
Status
Peer reviewed
ISSN
1094-2025Type
Journal article
Collections
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