Velocity Of Money Research Articles

The Velocity of Money and the Stock Market. A Comparative Forward and Backward Analysis

This study applied the panel autoregressive distributed lag (ARDL) model to examine the forward and backward relationships between the velocity of money and the traded stocks in samples of economies varies in term of the level of money supply relative to nominal GDP and the level of economic development during the period 2000-2019. The empirical findings show differentiated mutual relationships and degrees of response between the velocity of money and the value of traded stocks for each level of money supply relative to GDP and each level of economic development. For developed economics, the value of traded stocks highly and positively responds to the velocity of money and the velocity of money encourages the value of traded stocks. The degree of the positive response of the value of traded stocks to the velocity of money is relatively low in developing economies, and the value of traded stocks discourages the velocity of money in these economies. The response of the value of traded stocks to the velocity of money is negative in economies with high levels of money supply relative to their nominal GDP; the velocity of money negatively affects the value of traded stocks. As long as the level of the money supply is lying beneath the level of nominal GDP, the value of traded stocks responds positively and highly to the velocity of money. Finally, the effect of the velocity of money on the traded stocks is much stronger than the effect of traded stocks on the velocity of money.

ANALYSIS OF THE DEMAND FOR MONEY AND THE VELOCITY OF MONEY IN THE DIGITAL ECONOMY ERA: A CASE STUDY IN INDONESIA

In the digital economy era, efficiency and effectiveness are required in carrying out all life activities, including transaction activities. The urge to payment innovates systems as an effort to meet the needs of the community has led to several new non-cash-based payment instruments, such as paperless-based payment transactions. The existence of non-cash transactions shifts the role of cash in society. This study aims to examine the effect of paperless-based non-cash payments represented by credit cards, debit cards, and electronic money on the demand and velocity of money in Indonesia. Using monthly data sourced from Bank Indonesia and the Central Statistics Agency for the period 2010M1-2019M11. The right analysis used to see the effect of payment system innovation on-demand and velocity of money circulation is the Error Correction Model. The findings in the literature state that there is a significant effect of paperless-based payments as a form of payment system innovation on the demand and velocity of money circulation in Indonesia. The strong influence between the demand for money and the velocity of money with paperless-based non-cash transactions in Indonesia in the long term indicates that policymakers need to be careful in making decisions. The long-term relationship explains that the central bank can influence people's transaction behavior. Given that currency in circulation forms a significant part of a central bank's balance sheet, the shrinking demand for currency will have important implications on the central bank's seigniorage income, its independence, and its ability to conduct monetary policy. Thus, it is important to check and understand the trend of money demand and the velocity of money so that it can provide long-term profits.

Inflation risks and the global monetary boom

▀ Market nervousness about inflation has increased, in part due to strong monetary growth in the major economies. While we still think that the monetary boom is not a cause for anxiety, upside inflation risks have risen. ▀ Money growth has eased in the major economies in recent months but remains strong, mainly due to central bank asset purchases. Purchases are likely to fall in 2021 but will remain substantial. As a result, broad money growth in the major economies could remain at a double‐digit pace for a second year. ▀ Meanwhile, though private credit growth has indeed slowed, it's not clear it will move into negative territory as bank credit standards are not tightening the way they did after the global financial crisis. Reopening could provide a fillip, too. ▀ So far, rapid money growth has not translated into higher inflation because the velocity of money has fallen sharply. Central banks have to a large extent (correctly) been accommodating a much‐increased demand for liquidity. ▀ What happens to velocity in the next few quarters, however, is unclear. After the global financial crisis, velocity kept trending down, partly due to regulatory changes. But after the great depression and WWII, velocity recovered somewhat. Now, a release of forced savings and lower financial and economic risk might push velocity back up. ▀ A recovery in velocity, together with likely money and output growth rates for 2021, might be incompatible with low inflation. Inflationary upside might be slow to appear given inflation's inertial nature, but central banks will need to keep a close eye on inflation risk indicators over the next year.

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

The Non-Observed Economy in Morocco: Estimation and Analysis Using the Currency Demand Approach

Abstract This study estimates the size of the non-observed economy (NOE) in Morocco and analyzes its evolution over the period 1977 - 2019. We estimate a currency demand function following Tanzi’s (1980; 1983) Currency Demand Method. We take into consideration the difference in money velocities between the formal and informal sectors using the Ahumada et al.’s (2006) correction. We also adopt the fully modified least squares (FM-OLS) in order to tackle the series’ cointegration and to circumvent the serial autocorrelation issues. In terms of epistemological paradigms, we follow the positivism stance with a hypothetico-deductive approach. In addition to the conventional variables used in the currency demand approach, we emphasize the effects of other variables that are specific to the Moroccan context and that influence the size of its informal economy. Therefore, we introduce a dummy variable that captures the impact of banking regulations, net remittances, consumer price index, the part of government’s final public consumption in the Gross Domestic Product (GDP) and the part of public investment in GDP. The results of our econometric estimations show that remittances have a negative effect on currency demand. The weight of taxation, reforms, rising living costs, the part of wages in the national revenue, the consumer price index and the parts of public consumption and investment in GDP have a positive impact on the quantity of currency circulating in the economy. Keywords: Non-observed economy, informal sector, tax burden, fiscal evasion, money velocity currency demand method, fully modified least squares.

Money and Debt Demand: A Cyclic Model

The author attempts to reconstruct the money demand theory in the context of “debt demand,” by discussing the money demand of households and the debt demand of enterprises separately. This paper outputs the money demand function of the household sector and the debt demand function of the enterprise sector in a two-sector economy, and their cyclic models based on the analysis of income and consumption mismatch in economic entities. In addition, money velocity is internalized by introducing the average money duration and the average debt cycle. Finally, in a logically consistent way, the mechanism of financial crises in the economic cycle is interpreted by the monetary debt cycle model proposed in this article.

The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.

Markets for Crypto Tokens, and Security under Proof of Stake

Cryptocurrency systems based on proof of stake (PoS) grant governance rights to the holders of currency tokens and therefore are vulnerable to attack by adversaries who buy tokens in order to gain control. To evaluate the robustness of PoS cryptocurrencies to such attacks, we model the market for tokens and determine how the cost of attacking the system depends on the level and shape of token supply and demand. We show that, contrary to popular belief, the appreciation of tokens in response to demand by attackers plays a small role in securing the system. In particular, stablecoins can be less vulnerable to attack than cryptocurrencies that are freely floating. Moreover, PoS cryptocurrencies that primarily function as mediums of exchange are vulnerable to attack if the velocity of money is high.

Digital and electronic transactions against velocity of money

The payment system accumulates through an interbank fund transfer system, banking procedures, and a set of instruments that guarantee the circulation of money (Hancock & Humphrey, 1997). The theory of money expressed by Fisher is very striking and different from Marx’s. Marx only emphasizes monetary developments as contemporary capitalism. However, Fisher on the form of money and the function of money in a certain amount (as cited in Ivanova, 2020). The flow of electronic and digital transactions has continued to innovate over the past decade. An important point of this research is to identify electronic transactions and digital transactions against the velocity of money (VoM) in Indonesia. Fisher’s theory of money is applied to this study. Through a quantitative approach, time-series data for 2009–2019 was collected from the Bank of Indonesia and BPS-Indonesia. Multiple linear regression analysis is useful in interpreting the data. As a result, we find electronic transactions measured by credit cards appear to have a negative effect on VoM, but the impact is significant. Meanwhile, debit cards actually have a positive and significant effect on the value of VoM. Interestingly, other empirical results explore the relationship of digital transactions represented by e-money with VoM, where the effect is negative and insignificant. This finding is also very relevant to banking efforts to harmonize and adopt advanced technology in the financial system

Current State of US Economy Post-Pandemic and the Future of Core Inflation

The current state of the US economy is recognized with the highest debt level and a dramatic rise in the M2 Money Supply along with a decrease in the Velocity of Money. We target the exogenous nature of the recent negative output shock, and we employ a reduced form Vector Auto Regressive model to study the future of the Core Inflation. Our main findings confirm that a positive shock in the Velocity of Money, and M2 Money Supply (most significantly) will increase the Core Inflation beyond a transitory phase; while a positive shock in Unemployment Rate is associated with a negative response in Core Inflation. We find that initially after the shock, the Velocity of Money significantly explains the Core Inflation variability but moving forward in the horizon, the Supply of Money becomes the dominant indicator of the variability in the Core Inflation. We estimate the increase in the M2 Money Supple to drag up the annualized quarterly Core Inflation to more than 4 percent for the third quarter and to more than 3.7 percent for the fourth quarter of 2021.

Money Demand in Nigeria: Application of Autoregressive Distributed Lag (ARDL) Approach

Monetary authorities have shown an increasing appetite for a steady demand for money function in Nigeria because of its vital role in conducting effective monetary policy. This paper presents a clear position of the money demand function deemed important for monetary policy implementation, especially with regard to a monetary targeting framework. The paper aimed to estimate a broad money demand function using quarterly data from Q11981 to Q4 2018. The autoregressive distributed lag/bounds test model was utilized for the cointegration test. The characteristics of the time series for the study were determined with the aid of the augmented Dickey–Fuller (ADF) and Phillips–Perron tests. The empirical results show the existence of cointegration among broad money demand, income, interest rate (I), real exchange rate (REXR) and inflation rate (INFL) within the considered period. Consequently, an error correction model (ECM) was set up to explain the short-run dynamics and we observed that the short-run adjustment for disequilibrium correction was insignificant. From the empirical findings, it was noticed that the velocity of money in the economy is predictable and, as such, a money supply target could be employed to regulate income and price levels.

GROWTH EFFECTS OF FOREIGN DIRECT INVESTMENT AND FINANCIAL DEEPENING IN NIGERIA (1981-2018)

This study investigates growth effects of foreign direct investment and financial deepening in Nigeria for the period 1981-2018. Data employed for this study were obtained from Central Bank of Nigeria Statistical Bulletin and World Development Indicators. Pairwise granger causality test and autoregressive distributed lag (ARDL) model were employed in the data analysis. Empirical results show that foreign direct investment (FDI) has positive significant effect on economic growth (GDP) in Nigeria both in the long and short runs. Financial deepening measured as broad money supply as a ratio of GDP (broad money velocity) has positive significant effect on GDP in Nigeria in the long run but the position is reversed to negative non-significant in the short run. In the long run, financial deepening indicator-credit to private sector as a ratio of GDP-, has negative non-significant effect on GDP in Nigeria while its influence is absent in the short run model. Findings also reveal a unidirectional causality from FDI to GDP. Likewise, unidirectional causality flows from GDP to each of the two financial deepening indicators, thus lending credence to the demand-following hypothesis. This study concludes that foreign direct investment and financial deepening have positive growth effects in Nigeria with causality flowing from foreign direct investment to economic growth and the latter granger-causing financial deepening in Nigeria. To boost economic growth, there is a need for Nigeria’s government to further develop the financial system and implement policies to stimulate FDI inflows to the country.

Growth and wage effects of the monetary policy

AbstractWe analyse the effects of the monetary policy (inflation) on a set of real macroeconomic variables, via cash‐in‐advance (CIA) constraints and an ‘inflation‐rate’ complexity R&D effect in a knowledge‐driven horizontal R&D growth model with skilled and unskilled labour. The model is calibrated to the U.S. economy. We find that the monetary policy has no effect on firm‐size growth, but a negative impact on economic growth, real interest rate, skill premium, R&D intensity, and welfare; positive influence on the velocity of money. The sign of the theoretical relationships is in line with the dominant empirical evidence.

Cryptocurrencies and the Velocity of Money

Velocity of money is central to the quantity theory of money, which relates it to the general price level. While the theory motivated countless empirical studies to include velocity as price determinant, few find a significant relationship in the short or medium run. Since the velocity of money is generally unobservable, these studies were limited to use proxy variables, leaving it unclear whether the lacking relationship refutes the theory or the proxies. Cryptocurrencies on public blockchains, however, visibly record all transactions, and thus allow to measure - rather than approximate - velocity. This paper evaluates most suggested proxies for velocity and also proposes a novel measurement approach. We introduce velocity measures for UTXO-based cryptocurrencies focused on the subset of the money supply effectively in use for the processing of transactions. Our approach thus explicitly addresses the hybrid use of cryptocurrencies as media of exchange and as stores of value, a major distinction in recently proposed theoretical pricing models. We show that each of the velocity estimators is approximated best by the simple ratio of on-chain transaction volume to total coin supply. Moreover, “coin days destroyed”, if used as an approximation for velocity, shows considerable discrepancy from the other approaches.

Some amendments to the algebraic representation and empirical estimation of the fiscal multipliers

Conventional algebraic estimate of the fiscal multipliers ignores the concept of velocity of money and mistakenly assumes that money changes hands an infinite number of times during a given year while we know money only has a finite velocity. Apart from the velocity of money, fiscal multipliers tend to depend on average propensity to consume and average propensity to import of the economy as a whole and also on average tax rate among other things which are not reflected in the modern SVAR based estimation. Here, in the first place, we amend the algebraic definition of the fiscal multipliers considering the impact of velocity of money, provide a micro-foundation relating fiscal multipliers with money velocity and other macro variables and later propose a modification in the conventional SVAR set up by incorporating aforesaid macro variables arranged in a logical manner. Proposed amendments to the SVAR set up entail relatively stable estimates of the fiscal multipliers as can be seen from empirical estimation of the multiplier values for US and UK data during the period 1972-2018.

Real liquidity and banking

In an economy where banks take numeraire goods, so called money, as deposits, money allows depositors suffering preference shocks to withdraw from banks prematurely without liquidation of real investment. If real liquidity, defined as the real value of the monetary base, is low, the amount of payment liquidity, constrained by the velocity of money, limits the short-term price level of investment goods before banks can settle their long-term loan contracts. This leads to an attractive nominal long-term investment return and over-investment. Allowing for inside money, that is, bank deposits, to be used for payment can improve social welfare but cannot fully resolve the liquidity shortage problem as the short-term interest rate offered by banks is constrained by the threat of bank runs. In the presence of systemic liquidity shocks, the price-adjustment mechanism cannot take full effects with insufficient payment liquidity, which can lead to non-zero profits for banks. Exchanging investment goods for numeraire goods through international trade can improve social welfare.

"독일, 영국 및 미국에서의 통화공급, 이자율과 통화유통속도"

"독일, 영국 및 미국에서의 통화공급, 이자율과 통화유통속도"

중국 비현금결제의 확대가 화폐수요 및 유통속도에 미치는 영향

중국 비현금결제의 확대가 화폐수요 및 유통속도에 미치는 영향

Stock market liquidity, funding liquidity, financial crises and quantitative easing

Using data from 2003 to 2013, we examine liquidity linkages, originating with the U.S. Federal Reserve Bank (FED) reserve creation, resulting from conventional and non-conventional monetary policy. These reserves, in turn, impact commercial bank credits/lending and U.S. stock market liquidity. We find that stock market liquidity varies across different monetary policy subperiods, where liquidity is strongly influenced by changes in bank lending and M2 money velocity. FED monetary policy that results in bank reserve increases generally stimulates bank lending and subsequently, is accompanied by stock liquidity gains. These linkages were observed during the 2007–09 recession and QE-1 subperiods, where increasing FED assets and bank credits were accompanied by stock liquidity increases. However, even though FED assets and excess bank reserves increased substantially during QE-2 and QE-3, we find no commensurate increases in bank lending/credits or M2 Velocity. We find that QE-2 and QE-3 had no effect or negative impacts on stock liquidity. These findings support our hypothesis that enhancements in stock market liquidity generally occur only when FED stimulus coincides with commensurate increases in bank lending. Additionally, we find positive effects of short-selling during periods of high market uncertainty, and positive effects from the FED being allowed to pay interest on excess reserves (IOER).

Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting?

ABSTRACT This paper discusses the theoretical choice of exchange rate regimes in Sub-Saharan African countries that are facing external vulnerabilities. To reduce instability, policymakers choose among promoting external competitiveness using a real anchor, lowering the burden of foreign debt using a nominal anchor or using a policy mix of both anchors. We observe that these countries tend to adopt mixed anchor policies. We solve a state space model to explain the determinants of and the strategy behind this policy. We find that the mixed targeting policy is a two-step strategy: First, monetary authorities choose the degree of nominal exchange rate flexibility according to the velocity of money, trade openness, foreign debt, degree of exchange rate pass-through and exchange rate target zone. Second, authorities seek to stabilize the real exchange rate depending on the degree of competition in the domestic goods market and the degree of foreign exchange intervention. We conclude with regime-switching estimations to provide empirical evidence of how these economic fundamentals influence exchange rate policy in Sub-Saharan Africa.