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Velocity Of Money

Definition

The term "velocity of money" refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average same unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one unit of money is spent to buy goods and services per unit of time. Alternatively and less frequently, it can refer to the transactions velocity of money, which is the frequency with which the average unit of currency is used in any kind of transaction in which it changes possession—not only the purchase of newly produced goods, but also the purchase of financial assets and other items."

What is the 'Velocity Of Money'

The velocity of money is the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.

Explaining 'Velocity Of Money'

Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant.

Velocity of Money & the Economy

There are differing views among economists as to whether velocity of money is a useful indicator of the health of an economy or, more specifically, inflationary pressures. The "monetarists" who subscribe to the quantity theory of money argue that money velocity ought to be stable absent changing expectations, but a change in money supply can alter expectations and therefore money velocity and inflation. For example, an increase in the money supply should theoretically lead to a commensurate increase in prices because there is more money chasing the same level of goods and services in the economy. The opposite should happen with a decrease in money supply. Critics, on the other hand, argue that in the short term, the velocity of money is highly variable, and prices are resistant to change, resulting in a weak and indirect link between money supply and inflation.


Further Reading


Financial development and the velocity of money in Nigeria: An empirical analysis
www.ceeol.com [PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Financial development and income velocity of money in BangladeshFinancial development and income velocity of money in Bangladesh
www.jstor.org [PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

The Changes in the Velocity of Money: Example from China (1978-1997)<span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JRYJ906.005.htm' />The Changes in the Velocity of Money: Example from China (1978-1997)[J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JRYJ906.005.htm'>PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

The long run behavior of the income velocity of money in five advanced countries, 1870–1975: An institutional approachThe long run behavior of the income velocity of money in five advanced countries, 1870–1975: An institutional approach
onlinelibrary.wiley.com [PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Institutional change and the velocity of money: A century of evidenceInstitutional change and the velocity of money: A century of evidence
onlinelibrary.wiley.com [PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Reconsideration of the Velocity of Money——A analysis of the relationship between fictitious economy and real economy from 1993 to 2003 in China <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200409011.htm' />Reconsideration of the Velocity of Money——A analysis of the relationship between fictitious economy and real economy from 1993 to 2003 in China [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200409011.htm'>PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Determinants of the Decline in Income-Velocity of Money in China: A New Perspective <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-ZSHK200504001.htm' />Determinants of the Decline in Income-Velocity of Money in China: A New Perspective [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-ZSHK200504001.htm'>PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Why does the velocity of money move pro‐cyclically?Why does the velocity of money move pro‐cyclically?
www.tandfonline.com [PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Income-velocity of money in agricultural developing economiesIncome-velocity of money in agricultural developing economies
www.jstor.org [PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …

Study of Money Multiplier and Income Velocity of Money in China <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JRYJ200009003.htm' />Study of Money Multiplier and Income Velocity of Money in China [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JRYJ200009003.htm'>PDF]
… of monetary policy for purpose of ensuring price stability and rapid economic growth in … AE Akinlo, Ph.D., is Professor in the Department of Economics, Obafemi Awolowo University … the many existing literature on the determinants or behaviour of money velocity by incorporating …



Q&A About Velocity Of Money


What is velocity of money?

Velocity of money is the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in a given period of time.

What happens when you increase the supply of currency?

Theoretically, you would expect prices to rise since there's more chasing goods and services; however, this doesn't always happen quickly or directly because price levels aren't immediately adjusted by sellers nor buyers' expectations immediately altered by new information."

How does velocity relate to business cycles?

Economies that exhibit higher velocities tend to be further along in the business cycle and should have higher rates of inflation, all things held constant.

What are some differing views about velocity?

There are differing views among economists about whether velocity can be useful indicator for inflationary pressures. The "monetarists" who subscribe to the quantity theory argue that it should remain stable absent changing expectations, but changes in money supply can alter expectations and therefore change both velocity and inflation. For example, an increase in the supply should lead to commensurate increase in prices because there's more chasing goods and services while a decrease should do opposite. Critics on other hand argue that short term variations make it difficult to establish any direct link between changes in money supply and inflation. They also point out that prices are resistant to change resulting weak indirect link between them.

Is velocity of money measured as a ratio or an absolute number?

Velocity of money is measured as a ratio.

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