A revival of money velocity would pressure the US Fed

Significance The debate about how transitory this inflation is will persist. One way to consider the phenomenon is to examine the velocity of money -- the ratio of nominal GDP to monetary aggregate M1 or M2 -- which measures how many times money is changing hands, reflecting the willingness of consumers and businesses to engage in economic transactions. Money velocity remains modest but, if it rises, inflation pressures will also rise. Impacts The extent to which pandemic-related behavioural changes persist will shape the longer-term economic outlook and change many sectors. The Fed's communication policy will be key to calming markets; research shows that it has successfully anchored inflation expectations. Two years after COVID-19 was first known to be circulating, its spread remains the largest influence on the economic outlook.

Debit and Credit Cards: Money Velocity Risks

Payment system innovations as the efforts to meet the people’s needs have recently risen several new non-cash-based payment instruments, such as card-based payment transactions. The upheaval of card-based non-cash transactions has indirectly shifted the role of cash in the society. This research aims to see the effect of cards as payment instruments represented by both debit and credit cards on money velocity in Indonesia within the period of 2016M1 to 2020M6 using the VECM (Vector Error Correction Model) analysis method. The research findings show that long-run card-based payment instrument has a significant effect on money circulation in Indonesia. It means that money velocity in Indonesia is not constant. Money velocity is a key concept in monetary theories and an important element for monetary analysis. Therefore, it is important for central bank to monitor and understand the money velocity trends to provide long-term benefits. The research findings are also expected to provide an additional insight to policymakers, especially central bank as monetary authority doe to the possibly occurring risks caused by the money circulation instability in economy.

Velocity of Money in Ethiopia

Velocity of money is an important instrument used to measure the monetary target and quality of monetary policy. Referencing the trends in the money velocity, mainly in the short term, will have a paramount effect in determining the trends in real money growth. This study investigates the main causes of money velocity in Ethiopia using time series data for the period 1974/75 to 2015/16. A regression with Bayesian estimation and nonparametric Locally Weighted Scatterplot Smoothing (LOWESS) methods were used to analyze the data. Variables such as credit, real interest rate, real exchange rate and real per capita income were included as potential determinants of money velocity. The findings of using non-parametric LOWESS methods show an upward trends in the velocity of money since 2002 and downward trends before 2002, indicating the existence’s of prudent monetary policy in Ethiopia after 2002. The result also shows a positive effect of real exchange rate and credit, whereas income per capita and real interest rates have a negative effect on velocity of money in Ethiopia. Hence, this paper recommends that, the policy to encourage sustainable economic growth and increase in interest rate would be beneficial to reduce velocity of money.

GROWTH EFFECTS OF FOREIGN DIRECT INVESTMENT AND FINANCIAL DEEPENING IN NIGERIA (1981-2018)

This study investigates growth effects of foreign direct investment and financial deepening in Nigeria for the period 1981-2018. Data employed for this study were obtained from Central Bank of Nigeria Statistical Bulletin and World Development Indicators. Pairwise granger causality test and autoregressive distributed lag (ARDL) model were employed in the data analysis. Empirical results show that foreign direct investment (FDI) has positive significant effect on economic growth (GDP) in Nigeria both in the long and short runs. Financial deepening measured as broad money supply as a ratio of GDP (broad money velocity) has positive significant effect on GDP in Nigeria in the long run but the position is reversed to negative non-significant in the short run. In the long run, financial deepening indicator-credit to private sector as a ratio of GDP-, has negative non-significant effect on GDP in Nigeria while its influence is absent in the short run model. Findings also reveal a unidirectional causality from FDI to GDP. Likewise, unidirectional causality flows from GDP to each of the two financial deepening indicators, thus lending credence to the demand-following hypothesis. This study concludes that foreign direct investment and financial deepening have positive growth effects in Nigeria with causality flowing from foreign direct investment to economic growth and the latter granger-causing financial deepening in Nigeria. To boost economic growth, there is a need for Nigeria’s government to further develop the financial system and implement policies to stimulate FDI inflows to the country.

Demand deficiency, money velocity and heterogeneity

Aim: Money velocity data for the United States show that there is a decline in all of the broad money aggregates in recent decades. This points to a sustained demand deficiency element. Can consumer heterogeneity be the cause of this declining trend? The aim of this paper is to find an answer for this question. Design / Research Methods: To achieve our aim we use Agent Based Modelling (ABM). In our model, the agents are heterogeneous consumers with different spending propensities. Conclusions / findings: We show that heterogeneous consumers with different spending propensities alone puts a downward pressure on money velocity. This pressure is coupled with a sustained worsening in the wealth distribution. We observe that as money accumulates in the hands of agents with the lowest propensity to spend, money velocity keeps declining. This also puts a downward pressure on nominal aggregate demand and hence a deflationary bias on the general price level. Originality / value of the article: This paper shows that heterogeneity of economic agents should not be ignored and that ABM is a very powerful tool to analyse heterogeneity. Implications of the research: The implication for policy makers is that the demand deficiency associated with the fall in money velocity will persist until the worsening of wealth dispersion comes to a halt.