What Determines the Velocity of Money?
1. Customs and Conventions of Commerce: The velocity of money has increases over time as a variety of commercial innovations have facilitated exchange. (charge accounts, credit cards, ATMs, debit cards) 2. Frequency with which workers get paid. More frequent greater velocity 3. The better money serves as a store of value, the more people hold and the less the velocity. 4. Inflation increases, velocity increases. D. How Stable is Velocity – Between 1973 and 1979, velocity grew each year at a rate between 3-4.3 percent. Late 1970s were a high point for monetarists. – After 1979, the velocity of M1 became more erratic. – Velocity of M1 has continued to be unpredictable in the 1990s. The equation of exchange is less reliable. – In 1987, the Fed switched to velocity of M2 in setting objectives for monetary growth. – In 1993, the Fed announced that monetary aggregates are not reliable guides for monetary policy. IV. Money Supply v. Interest Rate Targets Indirect channel Monetary authorities
