Why Does Velocity Matter?

Abstract

THE significant decline in the income velocity of money during 1982 and in the first quarter of 1983 has engendered confusion and controversy.’ Amid this controversy, little attention has been paid to the more fundamental role velocity plays in macroeconomics and, hence, about its potential and actual importance in the conduct of monetary policy. This article sets forth the concept of income velocity and illustrates the potential effects of a change in velocity for monetary policy.