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Velocity in the long run: money and structural transformation

Research output: Working paperDiscussion paper

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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.
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Original languageEnglish
Place of PublicationSt Andrews
PublisherUniversity of St Andrews
Pages1-44
Number of pages44
Publication statusPublished - 28 Jul 2016

Publication series

NameSchool of Economics and Finance Discussion Paper
PublisherUniversity of St Andrews
No.1610
ISSN (Print)0962-4031
ISSN (Electronic)2055-303X

    Research areas

  • Structural transformation, Monetary shares, Velocity, Agricultural productivity , Non-monetary exchange

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