Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks

Szilárd Benk (), Max Gillman () and Michal Kejak ()

No E2007/14, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: The explanation of velocity in neoclassical monetary business cycle models relies on a goods productivity shocks to mimic the data's procyclic velocity feature; money shocks are not important; and the financial sector plays no role. This paper sets the model within endogenous growth, adds exchange credit shocks, and finds that money and credit shocks explain much of the velocity variation. The role of the shocks varies across sub-periods in an intuitive fashion. Endogenous growth is key to the construction of the money and credit shocks since these have similar effects on velocity, but opposite effects upon growth. The model matches the data's average velocity and simulates most of the velocity volatility that is found in the data. Its underlying money demand is Cagan-like in its interest elasticity, so that money and credit shocks cause greater velocity variation the higher is the nominal interest rate.

Keywords: Velocity; business cycle; credit shocks; endogenous growth (search for similar items in EconPapers)
JEL-codes: E13 E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2007-05
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Published in Journal of Money Credit and Banking Vol. 40, No. 6 (September 2008): 1281-1293.

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Related works:
Working Paper: Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks (2006)
Working Paper: Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks (2007)
Journal Article: Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:cdf:wpaper:2007/14

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