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Velocity

 
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PostPosted: Wed Sep 03, 2014 11:04 pm    Post subject: Velocity Reply with quote

http://www.stlouisfed.org/on-the-economy/what-does-money-velocity-tell-us-about-low-inflation-in-the-u-s/

And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:
•A glooming economy after the financial crisis
•The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).3

Indeed, during the prerecession period, for every 1 percentage point decrease in 10-year Treasury note interest rates, the velocity of the monetary base decreased 0.17 points, based on a linear regression model of the velocity onto interest rates. Since 10-year interest rates declined by about 0.5 percentage points between 2008 and 2013, the velocity of the monetary base should have decreased by about 0.085 points. But the actual velocity has gone down by 5.85 points, 69 times larger than predicted. This happened because the nominal interest rate on short-term bonds has declined essentially to zero, and, in this case, the best form of risk-free liquid asset is no longer the short-term government bonds, but money.

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My comment: Why would anyone hold money when inflation is positive?

Does it make much difference on growth how people save, whether in cash or bonds?

What about the large contraction in fiscal policy beginning in 2013?

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