A Banking Explanation of the US Velocity of Money: 1919-2004

34 Pages Posted: 17 Nov 2009

See all articles by Szilárd Benk

Szilárd Benk

affiliation not provided to SSRN

Max Gillman

Central European University (CEU) - Department of Economics

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: November 2009

Abstract

The paper shows that US GDP velocity of M1 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 (Ingram et al., 1994). 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.

Keywords: business cycle, credit shocks, velocity, Volatility

JEL Classification: E13, E32, E44

Suggested Citation

Benk, Szilárd and Gillman, Max and Kejak, Michal, A Banking Explanation of the US Velocity of Money: 1919-2004 (November 2009). CEPR Discussion Paper No. DP7544, Available at SSRN: https://ssrn.com/abstract=1507539

Szilárd Benk (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

Max Gillman

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3227 (Phone)
+36 1 327 3232 (Fax)

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

Politickych veznu 7
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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