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Velocity in the Long Run: Money and Structural Transformation

Listed author(s):
  • Antonio Mele

    (University of Surrey)

  • Radoslaw Stefanski

    (University of St. Andrews and University of Oxford)

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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File URL: https://repec.som.surrey.ac.uk/2016/DP11-16.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1116.

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Length: 45 pages
Date of creation: Jul 2016
Handle: RePEc:sur:surrec:1116
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Web page: http://www.surrey.ac.uk/economics/
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  1. Kuralbayeva, Karlygash & Stefanski, Radoslaw, 2013. "Windfalls, structural transformation and specialization," Journal of International Economics, Elsevier, vol. 90(2), pages 273-301.
  2. McCallum, Bennett T. & Nelson, Edward, 2010. "Money and Inflation: Some Critical Issues," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 3, pages 97-153 Elsevier.
  3. Radoslaw Stefanski, 2014. "Dirty Little Secrets: Inferring Fossil-Fuel Subsidies from Patterns in Emission Intensities," OxCarre Working Papers 134, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  4. Blades, Derek W, 1975. "Subsistence Activities in the National Accounts of Developing Countries with Special Reference to Latin America," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 21(4), pages 391-410, December.
  5. Mark Weisbrot & Rebecca Ray & Jake Johnston & Jose Antonio Cordero, 2009. "IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries," CEPR Reports and Issue Briefs 2009-37, Center for Economic and Policy Research (CEPR).
  6. Bordo, Michael D. & Schwartz, Anna J., 1980. "Money and Prices in the Nineteenth Century: An Old Debate Rejoined," The Journal of Economic History, Cambridge University Press, vol. 40(01), pages 61-67, March.
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