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A Banking Explanation of the US Velocity of Money: 1919-2004

  • Szilard Benk

    ()

    (Hungarian Central Bank)

  • Max Gillman

    ()

    (Institute of Economics - Hungarian Academy of Sciences)

  • Michal Kejak

    ()

    (The Center for Economic Research and Graduate Education of Charles University (CERGE EI))

The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0923.

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Length: 36 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:has:discpr:0923
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