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Velocity in the Long Run: Money and Structural Transformation

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  • Antonio Mele

    (University of Surrey)

  • Radoslaw Stefanski

    (University of St. Andrews and University of Oxford)

Abstract

Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not ‘always and everywhere a monetary phenomenon’: the composition of output influences money demand and hence the secular trends of price levels.

Suggested Citation

  • Antonio Mele & Radoslaw Stefanski, 2016. "Velocity in the Long Run: Money and Structural Transformation," School of Economics Discussion Papers 1116, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:1116
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    File URL: https://repec.som.surrey.ac.uk/2016/DP11-16.pdf
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    1. Velocity in the Long Run: Money and Structural Transformation
      by Christian Zimmermann in NEP-DGE blog on 2017-07-24 21:30:17

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    More about this item

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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