Velocity in the Long Run: Money and Structural Transformation

Radek Stefanski
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Radek Stefanski: University of St Andrews

No 168, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Monetary velocity declines as economies grow. We argue 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 92 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 influences money demand and hence the secular trends of price levels.

Date: 2017
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Velocity in the Long Run: Money and Structural Transformation (2019)
Working Paper: Velocity in the Long Run: Money and Structural Transformation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:168

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