Wednesday, May 6, 2009

Changes in the velocity of money

One of the problems that must be faced by the open Market Committee in the formulation of its monetary aggregate targets concerns the variability or lack of stability of the velocity of money, however measured, in the short run. such short-run instability of both the narrowly defined money supply, and the more broadly defined money supply. in general, on priori grounds, one would expected the income velocity to rise in a period when GNP is rising, as indeed it did in the early economic recovery period in 1975.However, income velocity declined in 1976, when GNP continued to grow but at a slower rate than in 1975. Such changes in the velocity of money, if not correctly foreseen, can be quite troublesome both for the policy makers on the FOMC and the practitioners on the Trading Desk at the Federal Reserve Bank of new York. The fact that the Manager of the System Account always attends the deliberations of the FOMC makes it possible for him to understand the spirit as well as the letter of the committee 's instructions, both as to desired targets of growth in the monetary aggregates and the amount of ease or pressure desired on the money and credit markets.

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