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Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks

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  • Benk, Szilárd
  • Gillman, Max

    ()
    (Cardiff Business School)

  • Kejak, Michal

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.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2007/14.

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Length: 18 pages
Date of creation: May 2007
Date of revision:
Publication status: Published in Journal of Money Credit and Banking Vol. 40, No. 6 (September 2008): 1281-1293.
Handle: RePEc:cdf:wpaper:2007/14

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Keywords: Velocity; business cycle; credit shocks; endogenous growth;

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Cited by:
  1. Nolan, Charles & Thoenissen, Christoph, 2008. "Financial shocks and the US business cycle," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-58, Scottish Institute for Research in Economics (SIRE).
  2. Max Gillman & Michal Kejak, 2007. " Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0703, Centre for Dynamic Macroeconomic Analysis.
  3. Nao Sudo, 2011. "Accounting for the Decline in the Velocity of Money in the Japanese Economy," IMES Discussion Paper Series 11-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2008. "US Volatility Cycles of Output and Inflation, 1919-2004: A Money and Banking Approach to a Puzzle," Cardiff Economics Working Papers E2008/28, Cardiff University, Cardiff Business School, Economics Section.
  5. Max Gillman & Anton Nakov, 2009. "Monetary effects on nominal oil prices," Banco de Espa�a Working Papers 0928, Banco de Espa�a.
  6. Max Gillman & Mark N. Harris, 2009. "The Effect of Inflation on Growth - Evidence from a Panel of Transition Countries," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0912, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  7. Hong, Hao, 2011. "Money, interest rates and the real activity," Cardiff Economics Working Papers E2011/18, Cardiff University, Cardiff Business School, Economics Section.
  8. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2010. "A banking explanation of the US velocity of money: 1919-2004," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(4), pages 765-779, April.
  9. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," CEU Working Papers, Department of Economics, Central European University 2012_13, Department of Economics, Central European University, revised 23 Jul 2012.
  10. Nolan, Charles & Thoenissen, Christoph, 2009. "Financial shocks and the US business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(4), pages 596-604, May.
  11. Max Gillman & Michal Kejak, 2008. "Tax Evasion and Growth: a Banking Approach," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0806, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  12. Scheffel, Eric, 2008. "Consumption Velocity in a Cash Costly-Credit Model," Cardiff Economics Working Papers E2008/31, Cardiff University, Cardiff Business School, Economics Section.
  13. Gillman, Max & Kejak, Michal, 2008. "Inflation, Investment and Growth: a Banking Approach," Cardiff Economics Working Papers E2008/18, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2008.

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