Working Paper: NBER ID: w2074
Authors: Michael D. Bordo; Lars Jonung
Abstract: This paper provides evidence and an explanation for an empirical regularity in the income velocity of money. Based on a cross country comparison in the post World War II period of 84 countries arrayed from very low to very high per capita income, velocity displays a U shaped pattern. This observed cross country pattern is very similar to one observed in an earlier study by the authors for a number of advanced countries for over a century. The U-shaped pattern of velocity behavior is explained by an approach which stresses the influence of institutional factors. On a secular basis the downward trend in velocity is due to a process of monetization while the upward trend is explained by financial development. On a cross country basis industrialized countries with we1 1 developed financial systems should generally display a rising 'trend in velocity while poor countries at an earlier stage of economics growth should as a rule have falling trends. Velocity in economies "in between" should exhibit a fairly flat pattern with a weak positive or negative trend.
Keywords: Income Velocity of Money; Financial Development; Monetization
JEL Codes: E41; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income velocity of money (E41) | U-shaped pattern in velocity across countries by per capita income (O57) |
| monetization processes (E42) | downward trend in velocity (E41) |
| financial development and economic stability (O16) | upward trend in velocity (E41) |
| institutional variables (D02) | explanatory power of velocity regression (C29) |
| institutional factors (D02) | permanent income elasticity of money demand (E41) |