What Is the Velocity of Money?

The velocity of money is the ratio of the money supply to total economic income (usually GDP). Measure the average transaction volume of unit currency. If the velocity of currency circulation in the economy is stable, then by simply setting the standard of the total amount, monetary policy can obtain any desired income level. In reality, the velocity of currency circulation is unstable, and the relationship between total economic income and the total amount of various currencies changes over time. ^[1]

Currency velocity

Right!

The velocity of money is the ratio of the money supply to total economic income (usually GDP). Measure the average transaction volume of unit currency. If the velocity of currency circulation in the economy is stable, then by simply setting the standard of the total amount, monetary policy can obtain any desired income level. In reality, the velocity of currency circulation is unstable, and the relationship between total economic income and the total amount of various currencies changes over time. ^[1]

The velocity of money circulation refers to the number of turnovers (or exchanges) of a unit currency within a certain period of time. It is equal to the nominal GDP and the nominal money supply.

There are mainly economic and psychological aspects, of which

The formula for calculating currency velocity from K. Marx on

The currency multiplier refers to the

From Fisher's trading equation MV = PY, the formula for calculating the currency velocity can be derived as: V = (PY) / M = GDP / M. The ratio of GDP to the money supply at different levels (GDP / M1, GDP / M2) represents the circulation speed of the corresponding level of money supply, of which GDP / M2 reflects the speed of money circulation in the long run, which is also the focus of economic research.

Throughout 1993-2004, the velocity of China's currency circulation has the following characteristics:

(1) The general trend of China's currency circulation speed is decreasing. From 1980 to 2004, the general currency velocity V2 dropped from 2.70 to 0.54, a drop of 80%; V1 dropped from 3.93 to 1.42, a drop of 63.9%, and the decline of V2 was much larger than V1. However, the fluctuation range of V1 is greater than 2. The variance of V1 from 1980 to 2004 is 0.46, and the variance of V2 is 0.40. From 1993 to 2004, the fluctuation of V1 is much larger than that of V2. The variance of V1 is 0.13, which is V2 of 0.029. 4.5 times, so V2 is more able to reflect the long-term trend of changes in the velocity of currency circulation than V1.

(2) China's currency circulation speed is obviously procyclical. The rate of increase and deceleration of the currency circulation rate and the rate of decrease of the currency circulation rate are closely related to the economic growth rate. During the period of high economic growth, the speed of currency circulation slowed down; while economic growth was in a low period, the speed of currency circulation decreased. The annual change rate of V2 has been non-negative three times since 1980 (1988, 1994, 2004), corresponding to three periods of economic upsurge; V1 also shows the same fluctuation characteristics, and the degree of response is stronger than V2; and the first two V1 lags the peak of GDP growth rate after two years and reaches the peak value, and V2 lags by one year. This close correlation between the speed of money circulation and the economic growth cycle arises from the acceleration of logistics and changes in money demand brought about by the economic growth cycle. When the economic growth is strong, residents' income increases and inflation expectations increase, and consumer desires rise. The speed of currency circulation has increased.

(3) China's currency circulation speed varies greatly from year to year, but there are signs of stability in recent years. From 1980 to 2004, the average annual rate of change in V1 was 6.32%, and the average annual rate of change in V2 was 6.65%; the maximum rate of change in V1 was 11.6%, and both decreased by 2.75%, and the maximum rate of change in V2 was 14.86%. In the 24 years from 1981 to 2004, V1 with a change rate of more than 8% had 5 years, and V2 had 8 years; V1 with a change rate of more than 5% had 12 years and V2 had 16 years. However, since 2003 and 2004, the annual change rate of currency circulation has shown signs of shrinking. The annual change rate of V2 in 2004 was about 1.9%, which is the most stable since 1981.

(4) The speed of China's currency circulation is lower than that of some foreign developed countries. In 1993, the nominal GDP of the United States was 655.3 billion U.S. dollars, the balance of M1 was 11.284 billion U.S. dollars, V1 was 5.81, and China was 2.12, which was more than twice the difference; V2 United States in 1993 was more than 1.5 times that of China. The speed of currency circulation varies from country to country, which is related to the level of economic and financial development and the consumption habits of residents in each country. China's currency circulation speed V2 is comparable to that of Japan, slightly lower than that of the United Kingdom, and has a large gap with the United States and emerging countries, South Korea. At the same time, the fluctuation of currency circulation speed in developed countries such as the United States is very small, and the variance of V2 from 1993 to 1999 is only 0.0026, which also shows to a certain extent that the degree of financial development in the United States is high and the economy is relatively stable.