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.
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.
1802 Responseshttp%3A%2F%2Fwww.economonitor.com%2Frebeccawilder%2F2009%2F07%2F27%2Fus-vs-canada-in-charts-the-velocity-of-money%2FUS+vs.+Canada+in+Charts%3A+the+Velocity+of+Money2009-07-27+10%3A45%3A13Rebecca+Wilderhttp%3A%2F%2Fwww.economonitor.com%2Frebeccawilder%2F2009%2F07%2Fus-vs-canada-in-charts-the-velocity-of-money%2F to “US vs. Canada in Charts: the Velocity of Money”
Edward is a macro economist, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows.
Edward is based in Barcelona, and is currently engaged in research on aging, longevity, fertility and migration, and the impact of all of these on economic growth. He is currently working on a book "Population, The Ultimate Non-renewable Resource?" He is a regular contributor to a number of economics weblogs, including India Economy Blog, A Fistful of Euros, Global Economy Matters and Demography Matters. He was, in fact, a founding member of all these weblogs.
Edward follows in detail the Indian, Italian, Spanish, German and Japanese economies. He has a more than a passing interest in the economies of Turkey and Brazil and in the emerging economies of Eastern Europe.
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