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Money Velocity with Costly Credit

Author Info

  • 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
Date of revision:
Handle: RePEc:wlu:wpaper:97-4
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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. Siklos, Pierre L, 1993. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 377-92, August.
  2. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-23, February.
  3. 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.
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  5. Hafer, R W & Jansen, Dennis W, 1991. "The Demand for Money in the United States: Evidence from Cointegration Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 155-68, May.
  6. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
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  8. Robert J. Hodrick & Narayana Kocherlakota & Deborah Lucas, 1989. "The Variability of Velocity in Cash-In-Advance Models," NBER Working Papers 2891, National Bureau of Economic Research, Inc.
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  18. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
  19. Melnick, Rafi, 1995. "Financial Services, Cointegration, and the Demand for Money in Israel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 140-53, February.
  20. Hoffman, Dennis L & Rasche, Robert H, 1991. "Long-Run Income and Interest Elasticities of Money Demand in the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 665-74, November.
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  23. 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.
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Cited by:

  1. 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.
  2. Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2012. "Rational Bubbles and Macroeconomic Fluctuations. The(De-)Stabilizing Role of Monetary Policy," AMSE Working Papers 1207, Aix-Marseille School of Economics, Marseille, France, revised 23 Mar 2012.
  3. Gancho Ganchev, 2010. "Equilibrium Model in a Monetary Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 97-115.
  4. Gillman, Max & Cziráky, Dario, 2005. "Money Demand in an EU Accession Country: A VECM Study of Croatia," Cardiff Economics Working Papers E2005/7, Cardiff University, Cardiff Business School, Economics Section.
  5. Cysne, Rubens Penha, 2004. "Solving the non-convexity problem in some shopping-time and human-capital models," Economics Working Papers (Ensaios Economicos da EPGE) 567, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Szilárd Benk & Max Gillman & Michal Kejak, 2006. " Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks," CDMA Conference Paper Series 0604, Centre for Dynamic Macroeconomic Analysis.
  7. Gancho Todorov Ganchev, 2010. "On the Utility of Money," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 32-60.
  8. Gancho Ganchev, 2010. "Equilibrium Model in a Monetary Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 24-45.
  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.

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