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Velocity in the Long Run: Money and Structural Transformation

Author

Listed:
  • Antonio Mele

    (University of Surrey)

  • Radoslaw Stefanski

    (University of St. Andrews)

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)

Suggested Citation

  • Antonio Mele & Radoslaw Stefanski, 2019. "Velocity in the Long Run: Money and Structural Transformation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 393-410, January.
  • Handle: RePEc:red:issued:16-224
    DOI: 10.1016/j.red.2018.09.004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Structural transformation; Monetary shares; Velocity; Agricultural productivity; Non-monetary exchange;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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