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The Variability of Velocity of Money in a Search Model

  • Weimin Wang
  • Shouyong Shi

We construct a dynamic equilibrium model where there is costly search in the goods market and the labor market. Incorporating shocks to money growth and productivity, we calibrate the model to the US time series data to examine the model's quantitative predictions on aggregate variables and, in particular, on the variability of consumption velocity of money. Despite the fact that money is the only asset, the model captures most of the variability of velocity in the data. It also generates realistic predictions on the moments of other variables and provides peresistent propagation of the shocks. The model generates these results largely because costly search gives an important role to the extensive margin of trade.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-190.

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Length: 54 pages
Date of creation: 13 Feb 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-190
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  19. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
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  28. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
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