Velocity in the Long Run: Money and Structural Transformation

Antonio Mele and Radoslaw Stefanski

No 1116, School of Economics Discussion Papers from School of Economics, University of Surrey

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.

JEL-codes: E4 E5 N1 O1 O4 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-07
New Economics Papers: this item is included in nep-mac, nep-mon and nep-sog
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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 (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:1116

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