ECONOMIC-GROWTH, FINANCIAL EVOLUTION, AND THE LONG-RUN BEHAVIOR OF VELOCITY

A general equilibrium model is presented in which buyers and sellers find it increasingly difficult to make private credit arrangements as economic activity spreads into new markets; hence, the demand for money increases as the structure of production and trade becomes more complex. At the same time, however, financial innovations allow agents to economize on their cash balances. Together, these effects of technological progress account for two empirical regularities, the U-shaped pattern in velocity and the ever-increasing share of productive resources devoted to the private financial sector, that are associated with the process of real economic growth.