Wednesday, May 30, 2012

Are Market Monetarists Right?- Could Stabilization Policy be that Simple? Part 1

I was recently explaining to someone why the large increase in the monetary base has not been inflationary nor is it likely to be inflationary for some time due to the fact that the Fed is not having any trouble finding people banks to hold the extra base at constant prices, when it occured to me I had not actually bothered to check to see how money-demand had faired over the course of the crisis. 

Well, here is the velocity of the M2 money supply ( Milton Friedman's my preferred aggregate). Remember the velocity is the inverse of money demand. 

Yep. That's what I expected to see; a huge plunge in M2 velocity from 2008-2009, not followed by an increase as of yet. Also, notice how recessions are always associated with a fall in velocity...

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