money velocity


Hi Cullen, thanks for taking the time again to answer random people’s questions.

The velocity of M1 and M2 money stock has been falling rapidly.
Do you think it will continue to fall?
What are the causes of this?
What are consequences of the money velocity going lower and lower?

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Posted by (Questions: 10, Responses: 9)
Posted on 07/27/2015 8:40 AM
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Hi Oshe,

The idea of money velocity has numerous problems. First, the equation of exchange is MV = Py. M in this equation is usually defined as the monetary base. But that is a fairly narrow definition of “money”. If you’ve read my work you know that money can be a pretty broad topic and is usually comprised of bank deposits. Further, you know that the quantity of deposits has no direct relationship to the monetary base.

Economists will generally say that a rise in the quantity of base money means that inflation will rise, but the recent conclusion, using this equation, is that the velocity is simply slowing. But this relies on an incomplete concept of “money”!

Basically, the equation is an accounting tautology that isn’t very useful since it’s based on flawed definitions of “money” and falsely assumes that “money” is some sort of static concept rather than something that exists on a scale of moneyness as I often describe.

I hope that helps!

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Cullen Roche Posted by (Questions: 10, Responses: 1858)
Answered on 07/28/2015 12:47 AM
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MV=Py is often mistaken as an accounting identity, but it is actual NOT. In NIPA production accounts, we can derive this accounting identity: Md V = P y where Md(money demand) = k * GDI (or GDP) V = 1/k, k is a constant. Two critical math modeling errors are shown in time-series data equation: M V = Py 1. Assumed money supply M(t) is equal to money demand Md(t) for all time periods t in our economy. In other words, whenever money supply M(t) is NOT equal to money demand Md(t), money “velocity” by using V = Py/M, does not reflect the economy reality. 2. Money velocity V is miscalculated by using money supplies M0, M1, … with V = Py/M0(or M1) In fact, money velocity V is independent of money supplies in our economy. V is dependent on the frequency of money demands in changing hands for exchanging products and services in GDP calculation. The frequency can be derived by all sector income in accounting.
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Posted by pliu412 (Questions: 0, Responses: 103)
Answered on 07/28/2015 4:15 PM