Velocity in the Long Run: Money and Structural Transformation

Antonio Mele and Radoslaw Stefanski

Review of Economic Dynamics, 2019, vol. 31, 393-410

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. (Copyright: Elsevier)

Keywords: Structural transformation; Monetary shares; Velocity; Agricultural productivity; Non-monetary exchange (search for similar items in EconPapers)
JEL-codes: E4 E5 N1 O1 O4 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.red.2018.09.004

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