VELOCITY OF MONEY IN A MODIFIED CASH-IN-ADVANCE ECONOMY - THEORY AND EVIDENCE

We develop a modified cash-in-advance model in which money is required prior to all the purchases of the consumption good and of a fraction of the capital good. This framework enables us to examine the main determinants of money velocity in a dynamic general equilibrium setting. We find that, contrary to standard beliefs, high-money-growth equilibria are associated with lower welfare and lower velocity than low-money-growth equilibria. This result is supported by empirical evidence, both over time and across countries.