Determinates of the decline in the income-velocity of money in China: a new perspective

Abstract

The income velocity of money in China has been declining since the country s reform. By studying the money demand behavior in the agricultural and non-agricultural sectors, we found that the marginal propensity to money demand is much higher in the non-agricultural sector. This implies that as the share of the agricultural sector in national income declines, monetary expansion is expected to meet not only the needs of income growth, but also the rapid structural shifts in the sectoral composition of income. Hence, non-inflationary monetary expansion is possible as development proceeds. This provides a new perspective in understanding the decline in the income-velocity of money in China.