Income Velocity Research Articles

The Velocity of Money and Lessons for Monetary Policy in Nigeria: An Application of the Quantile ARDL Approach

AbstractThe paper investigates the determinants and stability of the income velocity of money while accounting for structural breaks in its approach from the period Q1 1981 to Q4 2023 in Nigeria. The paper extends previous works by accounting for four velocities of money functions having accounted for structural breaks in its approach. The study adopted the Bai and Perron breakpoint test, the Zivot and Andrews, and Perron and Vogelsang structural break unit root tests to determine the break dates and the variables’ stationary properties. In analyzing the main results, the study used the quantile ARDL method to establish the determinants of income velocity of money in Nigeria, while it used the CUSUM tests to establish the stability of money velocity in Nigeria. The study found that the determinants of the velocity of money are per capita income, the exchange rate, financial development, inflation, and the interest rate across the four models. Furthermore, the four velocities of money functions were unstable for Nigeria using the cumulative sum and cumulative sum of squares tests. Consequently, the study recommends effective monitoring and the provision of sound monetary policies to ensure a stable and predictable velocity of money. This can be achieved by understanding and focusing on these key determinants and crafting informed strategies to manage economic growth and stability. This holistic approach ensures that the benefits of economic policies are felt broadly across the economy, ultimately bolstering overall financial health and enhancing the velocity of money, which is crucial for sustained economic progress.

Performance characteristics of the airlift pump under vertical solid–water–gas flow conditions for conveying centimetric-sized coal particles

In this study, the installation of an airlift pump with inner diameter of 102 mm and length of 5.64 m was utilized to consider the conveying process of non-spherical coal particles with density of 1340 kg/m3 and graining 25–44.5 mm. The test results revealed that the magnitude of increase in the solid transport rate due to the changes in the three tested parameters between compressed air velocity, submergence ratio, and feeding coal possibility was not the same, which are stand in range of 20%, 75%, and 40%, respectively. Hence, creating the optimal airlift pump performance is highly dependent on submergence ratio. More importantly, we measured the solid volume fraction using the method of one-way valves in order to minimize the disadvantages of conventional devices, such as fast speed camera and conductivity ring sensor. The results confirmed that the volume fraction of the solid phase in the transfer process was always less than 12%. To validate present experimental data, the existing empirical correlations together with the theoretical equations related to the multiphase flow was used. The overall agreement between the theory and experimental solid delivery results was particularly good instead of the first stage of conveying process. This drawback can be corrected by omitting the role of friction and shear stress at low air income velocity. It was also found that the model developed by Kalenik failed to predict the performance of our airlift operation in terms of the mass flow rate of the coal particles.

Estimating the effects of electronic money on the income velocity of money in Indonesia

Estimating the effects of electronic money on the income velocity of money in Indonesia

WHAT DRIVES MOVEMENTS IN THE INCOME VELOCITY OF MONEY? A CASE STUDY OF THE U.S.

In their efforts to stabilize the price level, central banks often rely on the growth rate in the stock of money as an intermediate target variable. Usually, the premise underlying this approach is that the income velocity of money, defined as the ratio of nominal GDP to the stock of money, either randomly fluctuates around a constant mean or can, at least, be predicted with sufficient accuracy. The purpose of this paper is to put this assumption to the test. We do so by applying a first-order autoregressive model, supplemented by a set of lagged exogenous regressors, to the quarterly changes in velocity in the U.S. Our results confirm previous findings that dynamic dependencies exist between changes in the income velocity of money over successive periods of time. They also support the assertion that rising long-term interest rates lower the demand for money. Perhaps most importantly, however, we find that all else being equal, the degree of financialization in the economy, measured by the ratio of financial assets to GDP, has a positive and statistically significant effect on velocity. A possible explanation of this finding is the increasing availability of tradable, non-monetary financial instruments that are close substitutes for bank deposits.

The monetary policy strategy of the Bank of England in 2020–21: An assessment

AbstractExcessive money creation during the Covid pandemic has resulted in Britain's worst episode of inflation since 1990–91. The backdrop to this failure of monetary policy is the Bank of England's aggregate demand/aggregate supply framework together with the Monetary Policy Committee's neglect of broad money. An alternative way to operate monetary policy is urgently needed. A significantly improved monetary policy outcome could be achieved by shifting from trying to steer the economy using interest rates and quantitative easing or quantitative tightening to reliance on the relative stability of income velocity (the ratio of nominal GDP to broad money) as a means of managing aggregate demand.

Financial shocks and their effects on velocity of money in agent-based model

Abstract The interaction of debt and economic performance has been getting more attention over the last few years. However, models making provision for debt are still outnumbered by models completely ignoring it. This paper is the first one to analyze the relationship between household debt (in the form of bank loans) and economic performance (in terms of aggregate income) considering both the impact of wealth and income distribution, and the impact of the MPC distribution under various financial shocks. The outcomes of the model are velocities calculated as ratios of aggregate income to aggregate debt. The paper demonstrates how financial shocks affect the income velocity of money under different distributions of wealth/income and marginal propensity to consume across the population. For this purpose, an original agent-based simulation model with a limited loan supply was designed. Proposed model shocks are shocks to loan demand, loan supply, marginal propensity to consume, macro-prudential regulatory ratios, real estate capital gains, repayment ratios, shocks to the structure of loans provided and to the structure of real estate property transactions. It is shown that the more equal the distributions of wealth/income and of the marginal propensity to consume, the higher is the income velocity of money. From financial shocks, the marginal propensity to consume shock and the shock to the structure of new real estate property purchases have the largest impact on velocity. The shock to regulatory ratios has generally the lowest magnitude.

On monetary growth and inflation in leading economies, 2021–22: Relative prices and the overall price level

AbstractFor most of the period since China started to reform and open its economy, falling goods prices in developed economies have been offset by rising service prices, but as a result of the COVID‐19 pandemic these relative price trends have been temporarily reversed. Separately from these relative price changes, the 2021–22 episode of inflation reflects broad money growth rates in many economies around the world since the start of the pandemic. The economies that are predicted to experience the greatest increase in inflation are those where monetary growth has increased most relative to the requirements to finance normal economic growth and the normal increase in demand for money balances (the inverse of income velocity).

Monetarist arithmetic at COVID‐19 time: A take on how not to misapply the quantity theory of money

AbstractThe COVID‐19 crisis has revived an old heated debate on whether significant increases in the money supply ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, though in our view, this has sometimes been in a misleading way. Against this background, this paper seeks to clarify several aspects of the quantity theory of money, which are useful to apply it fairly in the current world. First, we review the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioural concept: there is no such thing as a 'desired velocity'. Rather, income velocity should be seen as a variable deriving from a system of parameters and variables related to money demand, as the monetarist approach clearly puts it, with no intrinsic relevance. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. Third, we review the channels and assumptions underlying the asserted quantity theory link between money growth and inflation. In light of our analysis, we conclude that the high money growth rates seen since the pandemic outbreak are unlikely to translate into higher inflation rates.

Asset Prices and Velocity Decline: An Empirical Investigation

The quantity theory of money lost much of its significance in 1980s due to the phenomenon of velocity decline and consequent instability of the money demand function; missing financial transactions and asset prices were believed to be responsible (Borio, Kennedy and Prowse, 1994; and Werner, 2012). This study, therefore, uses asset prices for Pakistan to explain the velocity decline phenomenon in a regression model as well as in Vector Error Correction Model (VECM) using quarterly data for the time period 1981Q1-2018Q2. The study finds significant role of asset price index in explaining income velocity of money with a negative effect. Moreover, the sub-sample regressions show that asset prices are helpful in explaining velocity decline phenomenon for the time period 1981-1998 and 2008-2018 but not for 1998-2008. Moreover, there are brief periods in the sample when velocity actually increased despite an overall declining trend. To explain those short term reversals in velocity trend, the study uses indicator function. Results show that the increase in velocity for brief periods is also explained by asset prices

Monetarist Arithmetic at COVID-19 Time: A Take on How not to Misapply the Quantity Theory of Money

The Covid-19 crisis has revived an old heated debate on whether significant increases in the money supply -such as the ones accompanying central banks' unconventional policies- ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, sometimes in a misleading way in our view. Against this background, this paper seeks to clarify several aspects of the quantity theory of money and the so-called "monetarist" approach to it, useful to apply it fairly in the current world. First, we review and discuss the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioral concept: there is no such thing as a "desired velocity". Rather, income velocity should be seen as a reduced-form variable, obtained from a larger system of parameters and variables related to money demand, as the monetarist approach clearly puts it. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. We argue that although the quantity theory is unsuitable to explain conventional monetary policies, the mechanism on which it builds bears relevance in analyzing some recent unconventional monetary policies.

Empirical examination of the role of fintech in monetary policy

AbstractOver the past decade, technological innovations have changed the dynamics of the financial system. As a result, firms have used cellular phones, the Internet, and digital currencies to facilitate exchanges and operate their businesses. This course of action affects the transmission mechanism of monetary policy. The goal of the present study is to examine the role that fintech plays in the transmission mechanism of monetary policy. First, we analyse the income velocity and the money multiplier during pre‐fintech and post‐fintech periods. The results confirm that there is no change in income velocity and the money multiplier during these periods. Second, we develop the money demand function to examine the effect of monetary policy and demonstrate that low monetary policy rates lead to an increase in money demand. When we introduce fintech components to examine their impact on money demand, we find that mobile and Internet technologies and all digital currencies considered in this study are robust predictors of money demand. Third, we analyse the product market equation and report that after the initiation of fintech, monetary policy has a significant effect. To examine the cost function, we incorporate fintech components and identify that cellular phones, Internet technology, Litecoin, and Ethereum are the determinants of the output gap. Finally, we examine the drivers of fintech and determine that the real interest rate, GDP, inflation, the financial development index, and stock market indices are significant determinants of fintech.

Mobile Phone Payments and Demand for Cash: The Case of Tanzania

This paper examines recent developments in mobile phone transactions in Tanzania, the extent of its adoption by the general public and motivation for its usage. It also explores how development in mobile phone transactions has affected the demand for cash holdings including its components (denominations) using cointegration approach supplemented by survey. Empirical estimation of Vector Error Correction Model (VECM) of demand for cash using Johansen’s procedure provides no evidence of reduced cash usage driven by proliferation of mobile money transactions. Meanwhile, survey evidence has shown that, in Tanzania, mobile phone transactions have progressively gained pace over the recent years and is now the most used method of payment after cash. This trend is driven by harnessing of underlying financial regulations and platforms, acceptance of this method of payment, security for not carrying cash and simplicity in terms of speed and outreach among the counterparties. The paper concludes that the use of mobile phone money services creates additional pressure on income velocity of money, with potential impact on prices. Under the current quantity based monetary policy framework, this calls for ensuring that monetary policy formulation takes into consideration of this novel development.

THE POLAK’S MONETARY MODEL AND ITS APPLICATION ON MACEDONIAN CASE

Macroeconomic stability is very important for each economy because it constitutes the basis of sustainable economic growth and development. It means stable prices with a low level of inflation (internal stability), a stable foreign exchange rate, a relatively low and sustainable current account deficit in the balance of payments and a solvent position in the external indebtedness of the economy (external stability). International Monetary Fund (IMF) provides financial support to countries that have problems with internal and external stability. The IMF approach to macroeconomic stabilization is based on a so-called “monetary approach” to the balance of payments. The first IMF model designed for dealing with balance of payments disequilibrium was the Polak’s model on monetary programming. Its purpose is to integrate monetary, income and balance of payments analysis, and it represents the basis of the conditionality applied to IMF’s credit arrangements. This model investigates and determines the effect on income and balance of payments arising from the two important variables in the economy: (1) changes in domestic bank credits, and (2) changes in exports of goods and services. In other words, the model indicates what macroeconomics policies are required to achieve a given set of outcomes i.e. it determines policy targets consistent with explicit macroeconomic objectives. It consists of a set of four equations and contains two behavioral relationships: the demand for money function and the function of the demand for imports, and two identities: for the money supply and for the balance of payments. As such, Polak's monetary model extends classical quantitative money theory to the example of an open economy. Republic of North Macedonia, as a developing country that is remarkably open to the world (large share of export and import of goods and services in GDP) and with close cooperation with the IMF, the application of so-called financial programming based on Polak’s monetary model is of special importance. Based on the theoretical elaboration of the equations contained in the Polak’s monetary model, the paper attempts for its application to the case of Republic of North Macedonia and tries to determine and quantify the dependence of the changes in net foreign assets (foreign reserves) and gross domestic product (GDP) from the changes in domestic credits of the Macedonian banking sector. For that purpose, the data on gross domestic product (GDP), money supply (M4) and exports of goods and services for the period 2003-2018 were used from the State statistical office and National bank of the Republic of North Macedonia. By calculating the values of income velocity of money and propensity to import, the interdependence of domestic credits with gross domestic product and net foreign assets of the banking sector is calculated and analyzed.

DETERMINANTS OF INDONESIA’S INCOME VELOCITY OF MONEY

Using monthly time-series data and both short- and long-run models, our paper examines the determinants of Indonesia’s income velocity of money. Our findings strongly suggest that in the long-run, tax revenue, short-term interest rates, and industrial production, and in the short-run, money demand significantly determines income velocity of money. Our analysis suggests that the effect on income velocity is mostly over the long-run as most determinants are dormant in the short-run. The implication from a policy perspective is that shocks that are transitory are unlikely to burden income velocity.

Economic Transformation in Bangladesh and the Income Velocity of Broad Money: An Econometric Analysis

This study has undertaken an econometric analysis of economic transformation and income velocity of broad money. To find out the relevant determinants of income velocity of money this paper used time series data on year basis. This paper focus to discover the key determinants of the velocity of money in Bangladesh using the Augmented Dicky Fuller (ADF) unit root test to inspect the stationary, Engle-Granger residual-based cointegration approach to demonstrate the co-integrating association among variables. The main conclusions of this paper are: (i) relationship exists between the velocity of money and financial development. Other important variables that determine GDP growth show a negative relationship with the velocity of money but maintain a positive relationship with the deposit interest rate. Finally, this study concludes by giving some policy recommends for Bangladesh with respect to the velocity of broad money and the monetary policy.

A Monetary Analysis of the Liquidity Trap with an Application to the USA

Keynes emphasized a specific situation in which the liquidity preference becomes absolute, leading to monetary policy ineffectiveness when nominal interest approaches the zero-bound rate. This situation was termed a liquidity trap (LT) by Robertson and was popularized by the Hicks- Hansen framework (IS-LM). Early macroeconomic textbooks characterized the LT as the Keynesian case against the classical one. The “lowflation” environment experienced in the USA and Europe again brought the LT to the forefront. The quantitative easing monetary policy was introduced in Japan and better applied in the USA and EMU as a solution to overcome the LT. The macroeconomic mainstream contends that the LT is essentially a money demand problem, whereas we propose another interpretation; the current situation should be interpreted as a “banking problem” that impedes the transformation of the monetary base into money supply. To prove our thesis, we study the behavior of the USA money multiplier and the income velocity of money by comparing an earlier period with the 2007-2008 crisis period. Using a VAR and a VECM model, we compare the normal situation of monetary policy efficiency with the situation of LT monetary policy inefficiency. We prove that the LT focus should not be placed on the demand for money but rather on the behavior of the money supply – more specifically, on banks’ behavior leading to the transformation of the monetary base into the money supply.

Nonstationary response of a nonlinear economic cycle model under random disturbance

Stochastic mechanics is widely applied in the field of economics and econometrics. One important application is to study economic fluctuations in economic cycle theory. However, nonstationary response of nonlinear economic cycles with random disturbance is less investigated. This paper is devoted to studying the nonstationary response of a nonlinear economic cycle model. First, a nonlinear economic cycle model is developed according to the Goodwin model and the Puu nonlinear economic cycle model. Gaussian white noise is regarded as a spontaneous function in the developed nonlinear economic cycle model. Then, a path integration method is adopted based on Gauss–Legendre scheme and short-time Gaussian approximation for obtaining the nonstationary probability density function (PDF) of the nonlinear economic cycle model. The obtained results are verified by the simulation result. Finally, the evolution of the nonstationary PDF is studied in detail in the numerical analysis. The effects of system parameters are compared and discussed. The results show that the addition of the quadratic term of income velocity leads to the nonzero means of the PDFs of income and income velocity. Due to the presence of the quadratic and cubic terms, these PDFs have non-Gaussian distributions.

P-star model for India: a nonlinear approach

Abstract Inflation in India has been a major cause for concern in the recent past (2008–2012). This study examines the Indian wholesale price index inflation from 1951 to 2012 using P-star (or P*) models after accounting for the nonlinearities in the data by establishing the presence of a nonlinear long-run equilibrium. The paper establishes the presence of a threshold vector error correction model (TVECM) between prices and their long-run equilibrium with three optimal regimes to explain the short-run and long-run dynamics based on an error correcting transition term. Based on these results, the study classifies the various regimes that Indian inflation goes through based on historical economic events. The P* models (price gap, output gap and velocity gap models) were implemented regime-wise. The price gap models (output gap and income velocity gap determine inflation) were found to be optimal in the first and second regimes and consistent with theory. The velocity gap model (which has monetarist foundations) was found to be optimal in the third regime.

Determinants of the income velocity of money in Portugal: 1891–1998

This paper performs a long-run time series analysis of the behaviour of the income velocity of money in Portugal between 1891 and 1998 by assessing the importance of both macroeconomic and institutional factors and looking for particularities in the Portuguese case. We estimate two cointegration vectors for the income velocity of money, macroeconomic variables and institutional variables. It is apparent that one of these vectors reflects the relationship between income velocity and macroeconomic variables, while the other reflects the relationship between income velocity and institutional variables. Moreover, a regression analysis reveals that the usual U-shaped pattern is displayed with a relatively late inflection point located around 1970, which is consistent with the Spanish case. It is further noted that this is a feature of countries with a late economic and institutional development process.

Inflation targeting and income velocity in developing economies: Some international evidence

Developing economies tend to prefer or rely upon monetary policy rule with monetary aggregates due to institutional constraints on monetary policy conduct. One crucial condition for monetary aggregates to be a sound instrument is the stability of income velocity. Recently, inflation targeting has been adopted as an alternative monetary policy framework in various developing countries. This study attempts to examine how inflation targeting relates to the variability of income velocity and its components across 84 developing countries during the period from 1990 to 2013. The results suggest that inflation targeting would help stabilize income velocity in developing countries. In addition, a decomposition analysis of income velocity generally shows that inflation targeting would reduce the volatilities of inflation, real output growth, and money growth. Our results provide empirical support for the argument that stable income velocity associated with inflation targeting could improve the effectiveness of monetarism, such that monetary aggregates can serve as an appropriate instrument under inflation targeting regime in developing countries.