- The velocity of circulation of M0-as measured by the ratio of total consumer spending to narrow money-has been on a steady upward trend over the post-war period.
- Empirical studies have explained this trend in terms of financial innovation by the banking system, notably the introduction of alternative means of payment, interest-bearing current accounts, liquid savings accounts and Automated Teller Machines (ATMs).
- But changes in the composition of consumer expenditure and employment, related to rising incomes, have also contributed to this upward trend in velocity.
- Within total consumer spending, there has been a decline in the share of smaller value purchases, such as foodstuffs, and a rise in the share of larger value purchases, such as many services, cars, and household goods. Although all categories of expenditure are financed to some extent by cash, larger value purchases are more likely to be paid for by other means, thus reducing the stock of M0 in relation to total spending.
- Over the economic cycle, expenditure patterns vary. Spending on essentials grows more steadily than spending on luxuries. Because essentials are more likely to be purchased with cash, the growth of M0 fluctuates less than that of income. Although the evidence here is less strong, this phenomenon may have induced short-run movements in the velocity of M0.
Published on
01 September 1992
The demand for M0 revisited