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Saturday, March 25, 2006

The Income Velocity of Money

The latest issue of The Economist argues that central banks should pay more attention to monetary aggregates in the conduct of monetary policy. Nevertheless, the Fed discontinued reporting M3 on March 23. In light of this, and for those who might be interested, here's a few graphs showing velocity and velocity growth measures based upon M1, M2, and M3, where V PY/M and PY is nominal GDP:

To decompose the velocity growth movements, recall that V PY/M. Then, in terms of percentage changes, %ΔV ≡ %ΔP + %ΔY - %ΔM where %ΔP is inflation, %ΔY is output growth, and %ΔM is money growth. For those that are interested, the components are shown in these graphs of real GDP growth, inflation, M1 growth, M2 growth, and M3 growth.

    Posted by on Saturday, March 25, 2006 at 01:34 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)

          

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