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Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks

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Author Info
Szilárd Benk
Max Gillman ()
Michal Kejak

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Abstract

The explanation of velocity has been based in substitution and income effects, since Keynes’s (1923) interest rate explanation and Friedman’s (1956) application of the permanent income hypothesis to money demand. Modern real business cycle theory relies on a goods productivity shocks to mimic the data’s procyclic velocity feature, as in Friedman’s explanation, while finding money shocks unimportant and not integrating financial innovation explanations. This paper sets the model within endogenous growth and adds credit shocks. It models velocity more closely, with significant roles for money shocks and credit shocks, along with the goods productivity shocks. Endogenous growth is key to the construction of the money and credit shocks since they have similar effects on velocity, through substitution effects from changes in the nominal interest rate and in the cost of financial intermediation, but opposite effects upon growth, through permanent income effects that are absent with exogenous growth.

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Publisher Info
Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0604.

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Date of creation: Sep 2006
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Handle: RePEc:san:cdmacp:0604

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Related research
Keywords: Velocity; business cycle; credit shocks; endogenous growth.;

Other versions of this item:

Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-84, April. [Downloadable!] (restricted)
    Other versions:
  2. Clark, Jeffrey A, 1984. "Estimation of Economies of Scale in Banking Using a Generalized Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 53-68, February. [Downloadable!] (restricted)
  3. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2005. "A Comparison of Exchange Economies within a Monetary Business Cycle," Cardiff Economics Working Papers E2005/14, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  4. Urban Jermann & Vincenzo Quadrini, 2006. "Financial Innovations and Macroeconomic Volatility," NBER Working Papers 12308, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Wang, Weimin & Shi, Shouyong, 2006. "The variability of velocity of money in a search model," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 537-571, April. [Downloadable!] (restricted)
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  6. Stiroh, Kevin J & Strahan, Philip E, 2003. " Competitive Dynamics of Deregulation: Evidence from U.S. Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 801-28, October.
  7. Gillman, M. & Siklos, P.L. & Silver, J.L., 1997. "Money Velocity with Costly Credit," Working Papers 97-4, Wilfrid Laurier University, Department of Economics.
  8. repec:bep:mactop:v:5:y:2005:i:1:p:1137-1137 is not listed on IDEAS
  9. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February. [Downloadable!] (restricted)
  10. McGrattan, Ellen R., 1998. "Trends in velocity and policy expectations : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 305-316, December. [Downloadable!] (restricted)
  11. Berger, Allen N, 2003. " The Economic Effects of Technological Progress: Evidence from the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 141-76, April.
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  12. Gillman, M. & Siklos, P.L. & Silver, J.L., 1997. "Money Velocity with Costly Credit," Working Papers 97-4, Wilfrid Laurier University, Department of Economics.
    Other versions:
  13. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June. [Downloadable!] (restricted)
  14. David C. Wheelock & Paul Wilson, 2007. "Robust non-parametric quantile estimation of efficiency and productivity change in U.S. commercial banking, 1985-2004," Working Papers 2006-041, Federal Reserve Bank of St. Louis. [Downloadable!]
  15. Scott Freeman & Finn E. Kydland, 2000. "Monetary Aggregates and Output," American Economic Review, American Economic Association, vol. 90(5), pages 1125-1135, December. [Downloadable!] (restricted)
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  16. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Max Gillman & Michal Kejak, 2007. " Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings," CDMA Conference Paper Series 0703, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  2. Charles Nolan & Christoph Thoenissen, 2008. " Financial shocks and the US business cycle," CDMA Working Paper Series 0810, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
  3. Le, Vo Phuong Mai & Gillman, Max & Minford, Patrick, 2007. "An Endogenous Taylor Condition in an Endogenous Growth Monetary Policy Model," Cardiff Economics Working Papers E2007/29, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  4. Gillman, Max & Harris, Mark N., 2008. "The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries," Cardiff Economics Working Papers E2008/25, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  5. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2009. "US Volatility Cycles of Output and Inflation, 1919-2004: A Money and Banking Approach to a Puzzle," CEPR Discussion Papers 7150, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Scheffel, Eric, 2008. "Consumption Velocity in a Cash Costly-Credit Model," Cardiff Economics Working Papers E2008/31, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  7. Max Gillman & Michal Kejak, 2008. "Tax Evasion and Growth: a Banking Approach," IEHAS Discussion Papers 0806, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
  8. Gillman, Max & Nakov, Anton, 2008. "Monetary Effects on Nominal Oil Prices," Cardiff Economics Working Papers E2008/15, Cardiff University, Cardiff Business School, Economics Section, revised Nov 2009. [Downloadable!]
  9. 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. [Downloadable!]
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