The Movements of Monetary Velocity and Output Based on Modified Cash-in-advance Constraint in China

Abstract

This paper studies the effects of monetary, institutional and technological shocks to monetary velocity and output with structural vector autoregression model within dynamic general equilibrium framework in China. Empirical results show that monetary and institutional shocks make monetary velocity and output move in the same direction basically and technological shock makes monetary velocity decline in the short run, indicating narrow money is a luxury good. In terms of the movements of monetary velocity, institutional and monetary shocks have permanent positive effects, institutional shock is the most important, monetary shock is more important, and technological shock isn't important without long-run effect. In terms of the movements of output, monetary shock produces permanent Tobin effect, institutional and technological shocks have significant and permanent positive effects, institutional shock is the most important, technological shock is more important, and monetary shock isn't important.