EconoMonitor

The Wilder View

US vs. Canada in Charts: the Velocity of Money

US_velocity_rates.png
I have received a lot of requests to visit the velocity of money -the rate at which money changes hands. And I thought that it would be instructive to compare the US velocity to another non-QE G7 economy. And since I have a lot of Canadian readers, I chose Canada. The velocity has seriously slipped in both economies.
The chart above (or to the left, depending on your browser) illustrates the monthly MZM and M2 measures of velocity for the US. The quantity theory of money specifies that the velocity of money = nominal GDP/money supply, but I use personal income rather than nominal GDP, as the BEA reports this on a monthly basis. Given a level of money supply, the recent drop in economic activity, i.e., personal income falls, dragged the velocity of money down quickly. It has started to stabilize since March 2009.CAN_velocity_rate.png

Same in Canada: the money supply dropped sharply in Q1 2009 (velocity = nominal GDP/broad money).

Notice that the velocity in Canada has been on a downward trend spanning 1973-2009, however, the negative slope is falling. I am not too familiar with Canada’s velocity (perhaps some of my readers may be more so), but usually a declining velocity of money is associated with a drop in GDP or inflation. I would have to look into this further, but Canada did experience a term of disinflation from the early 80′s to mid 90′s.


Originally published at News N Economics and reproduced here with the author’s permission.

2 Responses to “US vs. Canada in Charts: the Velocity of Money”

Leave a Response

Most Read | Featured | Popular

Blogger Spotlight

Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (www.differencegroup.net), he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

Economics Blog Aggregator

Our favorite economics blogs aggregated.