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Why does the velocity of money move pro-cyclically?

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  • Pedro Leao

Abstract

The velocity of money usually rises in expansions and falls in recessions This paper explains this pro-cyclical movement of velocity using two ideas: (i) during business cycles the movement of investment and consumption of durable goods has a larger amplitude than consumption of non-durable goods and services; (ii) the velocity associated with expenditure on investment and durable goods is much higher than the velocity associated with consumption of non-durable goods and services, because the former expenditures are synchronized with the attainment of money by economic agents whereas the latter are not. In this setting, the rise in the weight of expenditure in durable goods relative to the weight of non-durable goods and services, which occurs during expansions, generates an increase in the average velocity of circulation. The opposite happens during recessions and thus velocity moves pro-cyclically.

Suggested Citation

  • Pedro Leao, 2005. "Why does the velocity of money move pro-cyclically?," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(1), pages 119-135.
    • Handle: RePEc:taf:irapec:v:19:y:2005:i:1:p:119-135
    DOI: 10.1080/0269217042000312641
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    References listed on IDEAS

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    1. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, March.
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    Cited by:

    1. I. Biefang-Frisancho Mariscal & P.G.A. Howells, 2012. "Income velocity and non-GDP transactions in the UK," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(1), pages 97-110, March.
    2. Robert Gmeiner, 2022. "The Chemistry of the Macroeconomy," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 18(3), pages 289-313, November.
    3. Stodder, James, 2009. "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 79-95, October.
    4. James Stodder & Bernard Lietaer, 2016. "The Macro-Stability of Swiss WIR-Bank Credits: Balance, Velocity, and Leverage," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 58(4), pages 570-605, December.

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