Ination Dynamics and Velocity of Money

There have been large changes in the velocity of money which could be a potential source of in‡ation variability. This paper extends a Calvo style sticky price model to examine the role of the velocity of money in in‡ation dynamics from both a theoretical and empirical perspective. When money is introduced via transactions cost, the resultant Phillips curve becomes a function of velocity as well as an output gap and a forward looking in‡ation terms, a feature for which we provide empirical support. More speci…cally, we adopt the GMMmethodology to estimate the velocity augmented Phillips curve using the US data between 1951 and 2005. We observe that historical in‡ation dynamics is consistent with the velocity-augmented forward looking Phillips curve. Hwagyun (Hagen) Kim is with Texas A&M University and Chetan Subramanian is with SUNY at Bu¤alo. Hwagyun can be reached via [email protected] or 979) 845-7352 for telephone. For Chetan, email address is chetan@bu¤alo.edu and phone: (716) 645-2121 ext. 426. We thank comments from Ken West, John Williams, Young Sik Kim, Jinill Kim, Junggun Oh, Hyun Eui Kim and other participants in the Bank of Korea-KAEA conference and WEAI conference. Usual disclaimer applies.