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A banking explanation of the US velocity of money: 1919-2004

Benk, Szilárd, Gillman, Max and Kejak, Michal 2010. A banking explanation of the US velocity of money: 1919-2004. Journal of Economic Dynamics and Control 34 (4) , pp. 765-779. 10.1016/j.jedc.2009.11.005

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The paper shows that US GDP velocity of money has exhibited long cycles around a 1.25% per year upward trend, during the 1919–2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Uncontrolled Keywords: Volatility; Business cycle; Credit shocks; Velocity
Publisher: Elsevier
ISSN: 0165-1889
Last Modified: 19 Mar 2016 22:30

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