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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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 209-228
Launched on MUSE
2006-04-24
Open Access
No
Archive Status
Archived 2007
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