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Money Velocity with Costly Credit

Author

Listed:
  • 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.

Suggested Citation

  • Gillman, M. & Siklos, P.L. & Silver, J.L., 1997. "Money Velocity with Costly Credit," Working Papers 97-4, Wilfrid Laurier University, Department of Economics.
    • Handle: RePEc:wlu:wpaper:97-4
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    Cited by:

    1. Vasilev, Aleksandar, 2021. "Are credit shocks quantitatively important for the propagation of aggregate fluctuations in Bulgaria (1999-2018)?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 5-20.
    2. 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.
    3. 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, April.
    4. 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.
    5. 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, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    6. Gancho Ganchev, 2010. "Equilibrium Model in a Monetary Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 24-45.
    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. 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.
    9. Gancho Ganchev, 2010. "Equilibrium Model in a Monetary Economy," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 97-115.
    10. 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.
    11. 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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    More about this item

    Keywords

    MONEY ; CREDIT ; DEMAND;
    All these keywords.

    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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