Banking Insights: Behavior of the Income Velocity of Money

Monetary policy decisions are based on the likely impact future money supply growth will have on the nation's economic activity. How much of an increase in the volume of money is needed to achieve the desired level of activity depends, however, on how intensively the stock of money is used—its velocity. If the rate of money use is expected to change from what it has been in the past, a different quantity of money will be needed to maintain the past level of economic activity. As each dollar is used more often, fewer dollars are needed to facilitate the same amount of transactions. As a first step in determining future velocity movements, it is useful to analyze the past.