Money, output and income velocity

This paper attempts to assess empirically the contribution of three structural shocks - monetary, institutional (financial and fiscal), and technological - to output and velocity fluctuations in the national bank era and the post-1973 period. To identify these shocks we impose only long-run restrictions, derived from a monetary growth model. We find that higher money growth increases (decreases) velocity in the first (second) period, depending crucially on the resulting changes in the transactions frequency. Credit-enhancing financial or expansionary fiscal shocks have a permanent positive effect on velocity and a hump-shaped effect on output, whereas technological shocks cause velocity to decrease in the short run and output to move to a permanently higher level.