Efficiency of the Payments System, Velocity of Circulation of Money, and Financial Markets
Year: 1997
Type: article
Abstract: The paper presents a general equilibrium monetary production model to illustrate the influence of unexpected changes in the efficiency of the payments system on the velocity of circulation of money and on the financial markets, in the presence of uncertainty. In this model, households face a cash-in-advance constraint and use a part of current income for present consumption. The results depend critically on the magnitude of the changes in the payment process relative to the monetary injections in the economy. If such changes are small, then the velocity of money is exogenously determined by the level of efficiency of the payments system. Moreover, the financial markets are affected by unexpected changes both in the money supply and in the velocity of money. In contrast, if the relative changes in the payment process are large, then the velocity of money is endogenously determined by households' decisions regarding cash-holding, lending, consumption, and labor. Moreover, it appears that the financial markets are affected only by changes in the rate of growth of money.
Author: Flavio Padrini
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1566418868