Velocity in the long run : money and structural transformation
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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.
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
Review of Economic Dynamics
Copyright © 2018 Elsevier Inc. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at: https://doi.org/10.1016/j.red.2018.09.004
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