Does Velocity Matter?

[thriftyandboringinohio]

Economists used to say the velocity of money was important.
If it is important, then this chart looks bad.

[jk]

Re: Does Velocity Matter?

i can'y see the chart - it's just a tiny box- but i can imagine what it looks like. there's a ton of money tied up in excess bank reserves on deposit with the fed. this has to distort any velocity calculation. but low velocity is why the fed keeps trying to foment some inflation. it would promote higher velocity.

[thriftyandboringinohio]

Re: Does Velocity Matter?

Thanks jk. I added the image a second time using a different embed URL, maybe you can see it now.
It's the federal reserve FRED chart for M2 velocity, all available data, browser link below.

https://fred.stlouisfed.org/series/M2V

[jk]

Re: Does Velocity Matter?

i had to go over to FRED to see it, but is IS impressive. i just don't have the numbers and time to try to back out excess reserves. excess reserves in size are a modern phenomenon and may make the comparisons misleading.

here's an article almost 3 years old which at least addresses the issue. some commenter talks about the opportunity cost of holding excess reserves, but i disagree. the fed is paying riskless interest to the banks on those deposits.

[patrikkorda]

Re: Does Velocity Matter?

Economists used to say the velocity of money was important.
If it is important, then this chart looks bad.

EJ mentioned that MZM is a better measure of the money supply compared to M0,M1,M2, etc. What is interesting about MZM Velocity is how strongly it correlates to interest rates. I ran this analysis a few years ago while writing up my thesis (mainly about long-term interest rates). I have my own interpretation about which is the independent variable, whether there is a latent variable at work, etc. Either way, the correlation is spooky (R2 is above .90)

[thriftyandboringinohio]

Re: Does Velocity Matter?

Thanks PK, fascinating.

[GRG55]

Re: Does Velocity Matter?

i had to go over to FRED to see it, but is IS impressive. i just don't have the numbers and time to try to back out excess reserves. excess reserves in size are a modern phenomenon and may make the comparisons misleading.

here's an article almost 3 years old which at least addresses the issue. some commenter talks about the opportunity cost of holding excess reserves, but i disagree. the fed is paying riskless interest to the banks on those deposits.

But didn't that become a necessary substitute to generate risk-free profits for the banks as the Fed instituted Operation Twist and deliberately flattened the yield-curve? And continued with subsequent QE policy by extending the duration of the financial assets it was buying.

This is one reason I don't believe there is much danger of the Fed inverting the yield curve, short of a real screw-up. I remain convinced the assets it bought starting with Twist in 2011 gives it more ability to manage the yield curve than ever before.

[jk]

Re: Does Velocity Matter?

But didn't that become a necessary substitute to generate risk-free profits for the banks as the Fed instituted Operation Twist and deliberately flattened the yield-curve? And continued with subsequent QE policy by extending the duration of the financial assets it was buying.

This is one reason I don't believe there is much danger of the Fed inverting the yield curve, short of a real screw-up. I remain convinced the assets it bought starting with Twist in 2011 gives it more ability to manage the yield curve than ever before.

i agree with all you say. my point is that i would think these actions would distort calculations of velocity.