Demand deficiency, money velocity and heterogeneity

Abstract

Aim: Money velocity data for the United States show that there is a decline in all of the broad money aggregates in recent decades. This points to a sustained demand deficiency element. Can consumer heterogeneity be the cause of this declining trend? The aim of this paper is to find an answer for this question.
 
 Design / Research Methods: To achieve our aim we use Agent Based Modelling (ABM). In our model, the agents are heterogeneous consumers with different spending propensities.
 
 Conclusions / findings: We show that heterogeneous consumers with different spending propensities alone puts a downward pressure on money velocity. This pressure is coupled with a sustained worsening in the wealth distribution. We observe that as money accumulates in the hands of agents with the lowest propensity to spend, money velocity keeps declining. This also puts a downward pressure on nominal aggregate demand and hence a deflationary bias on the general price level.
 
 Originality / value of the article: This paper shows that heterogeneity of economic agents should not be ignored and that ABM is a very powerful tool to analyse heterogeneity.
 
 Implications of the research: The implication for policy makers is that the demand deficiency associated with the fall in money velocity will persist until the worsening of wealth dispersion comes to a halt.