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Money Velocity with Costly Credit

Author Info

Listed author(s):
  • Gillman, M.
  • Siklos, P.L.
  • Silver, J.L.

Abstract

The paper functionally describes the income velocity of money by including the cost of a key substitute to money: exchange credit. Financial innovation causes the cost of credit to fall, the quantity of money demanded to fall, and the velocity to rise, all without shifting the money demand function. The paper derives a general equilibrium money demand function, specifies a parametric equation of the income velocity of money from the model, and finds cointegration between the relevant variables in an expanded velocity equation which also produces consistent dynamics. It explains U.S. post-war long-run velocity through only the substitution effects from the relative cost of exchange by money versus credit. It explains short run dynamics with the same substitution effect. In addition, evidence suggests that an income effect helps explain the dynamics as predicted by an application of the permanent income hypothesis.

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Paper provided by Wilfrid Laurier University, Department of Economics in its series Working Papers with number 97-4.

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Length: 35 pages
Date of creation: 1997
Handle: RePEc:wlu:wpaper:97-4
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Web page: http://www.wlu.ca/sbe/economics/

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Keywords: MONEY ; CREDIT ; DEMAND;

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Find related papers by JEL classification:
  • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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  1. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-384, April.
  2. Butkiewicz, James L. & McConnell, Margaret Mary, 1995. "The stability of the demand for money and M1 velocity: Evidence from the sectoral data," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(3), pages 233-243.
  3. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-123, February.
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  5. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219-219.
  6. Ireland, Peter N., 1994. "Economic growth, financial evolution, and the long-run behavior of velocity," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 815-848.
  7. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
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  17. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, June.
  18. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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  24. Siklos, Pierre L. & Granger, Clive W.J., 1997. "Regime-Sensitive Cointegration With An Application To Interest-Rate Parity," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 640-657, September.
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Cited by:

  1. 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, 09.
  2. Dario Cziráky & Max Gillman, 2006. "Money Demand in an EU Accession Country: A VECM Study of Croatia," Bulletin of Economic Research, Wiley Blackwell, vol. 58(2), pages 105-127, 04.
  3. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.
  4. Cysne, Rubens Penha, 2004. "Solving the non-convexity problem in some shopping-time and human-capital models," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 567, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  5. Gancho Ganchev, 2010. "Equilibrium Model in a Monetary Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 24-45.
  6. Gancho Todorov Ganchev, 2010. "On the Utility of Money," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 32-60.
  7. Gillman, Max & Otto, Glen, 2006. "Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity," Cardiff Economics Working Papers E2006/24, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2006.
  8. Gancho Ganchev, 2010. "Equilibrium Model in a Monetary Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 97-115.
  9. Cysne, Rubens Penha, 2006. "A note on the non-convexity problem in some shopping-time and human-capital models," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2737-2745, October.
  10. Xiong, Wanting & Fu, Han & Wang, Yougui, 2017. "Money creation and circulation in a credit economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 465(C), pages 425-437.

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