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The Behavior of Money velocity in Low and High Inflation Countries

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Abstract

This paper presents a general equilibrium model of money demand where the velocity of money changes in response to endogenous fluctuations in the interest rate. The parameter space can be divided into two subsets: one where velocity is constant as in standard cash-in-advance models, and another one where velocity fluctuates as in Baumol (1952). The model provides an explanation of why, for a sample of 79 countries, the correlation between the velocity of money and the inflation rate appears to be low, unlike common wisdom would suggest. The reason is the diverse transaction technologies available in different economies.

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  • Hugo Rodriguez Mendizabal, 2004. "The Behavior of Money velocity in Low and High Inflation Countries," UFAE and IAE Working Papers 600.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    • Handle: RePEc:aub:autbar:600.04
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    More about this item

    Keywords

    Money Demand; Money Velocity; Cash-in-Advance;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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