Working Paper: NBER ID: w10016
Authors: Fernando Alvarez; Andrew Atkeson; Chris Edmond
Abstract: We exposit the link between money, velocity and prices in an inventory-theoretic model of the demand for money and explore the extent to which such a model can account for the short-run volatility of velocity, the negative correlation of velocity and the ratio of money to consumption, and the resulting stickiness' of the aggregate price level relative to a benchmark model with constant velocity. We find that an inventory-theoretic model of the demand for money is a natural framework for understanding these aspects of the dynamics of money, velocity and prices in the short run.
Keywords: money demand; velocity; price stickiness
JEL Codes: E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous increase in money supply (E51) | decline in velocity of money (E41) |
| decline in velocity of money (E41) | less than one-for-one response of price level to changes in money supply (E41) |
| exogenous increase in money supply (E51) | sluggish response of price level (E31) |
| increase in frequency of replenishing bank accounts (G21) | impact of one percent increase in money supply approaches twelve percent (E51) |
| exogenous increase in money supply (E51) | twelve percent increase in price level initially (E31) |
| increase in money supply (E51) | affect inventory of money held by households (E41) |