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The Variability of Velocity of Money in a Search Model

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  • Weimin Wang
  • Shouyong Shi

Abstract

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.

Suggested Citation

  • Weimin Wang & Shouyong Shi, 2006. "The Variability of Velocity of Money in a Search Model," Working Papers tecipa-190, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-190
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    References listed on IDEAS

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    Cited by:

    1. Chiu, Jonathan, 2014. "Endogenously Segmented Asset Market In An Inventory-Theoretic Model Of Money Demand," Macroeconomic Dynamics, Cambridge University Press, vol. 18(02), pages 438-472, March.
    2. Brian Peterson & Shouyong Shi, 2004. "Money, price dispersion and welfare," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(4), pages 907-932, November.
    3. Szilárd Benk & Max Gillman & Michal Kejak, 2008. "Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1281-1293, September.
    4. Lynne EVANS & Anamaria NICOLAE, 2008. "The Output Effect Of Stopping Inflation When Velocity Is Time Varying," Journal of Information Systems & Operations Management, Romanian-American University, vol. 2(1), pages 231-253, July.
    5. Ricardo Lagos & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, May.
    6. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    7. José Cao-Alvira, 2012. "Velocity Volatility Assessment of Monetary Shocks on Cash-in-Advance Economies," Computational Economics, Springer;Society for Computational Economics, vol. 40(3), pages 293-311, October.
    8. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
    9. Telyukova, Irina A. & Visschers, Ludo, 2009. "Precautionary Demand for Money in a Monetary Business Cycle Model," MPRA Paper 15622, University Library of Munich, Germany.
    10. Benjamín García, 2016. "Welfare Costs of Inflation and Imperfect Competition in a Monetary Search Model," Working Papers Central Bank of Chile 794, Central Bank of Chile.
    11. Alok Kumar, 2013. "Inflation, Redistribution, and Real Activities," Department Discussion Papers 1302, Department of Economics, University of Victoria.
    12. Zhu, Tao, 2007. "Equilibrium Concepts in the Large Household Model," MPRA Paper 7444, University Library of Munich, Germany.
    13. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers 2009-031, Federal Reserve Bank of St. Louis.
    14. Martin Menner, 2011. ""Gesell Tax" and Efficiency of Monetary Exchange," Working Papers. Serie AD 2011-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    15. Ashley, Richard & Verbrugge, Randal, 2015. "Persistence Dependence in Empirical Relations: The Velocity of Money," Working Paper 1530, Federal Reserve Bank of Cleveland.
    16. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
    17. Telyukova, Irina A. & Visschers, Ludo, 2013. "Precautionary money demand in a business-cycle model," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 900-916.

    More about this item

    Keywords

    Velocity; Search; Inflation; Inventory; Propagation.;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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