Can we explain the shift in M0 velocity? Some time-series and cross-section evidence

Quarterly Bulletin 1996 Q1
Published on 01 March 1996

By Norbert Janssen of the Bank’s Monetary Assessment and Strategy Division.

  • Narrow money velocity has increased in the United Kingdom since the Second World War. This can be explained largely by innovations in the payments system. But in the 1990s narrow money velocity growth slowed sharply and recently became negative.
  • Detailed analysis reveals a slowdown in cash-saving financial innovations in recent years.
  • The recent shift in narrow money velocity may also be related to the move to lower inflation in the United Kingdom in the 1990s. A cross-country comparison of the relation between narrow money velocity and inflation indicates that falling velocity in the United Kingdom is not exceptional by international standards. However, shifts in inflation have not been the only reason for movements in narrow money velocity in other countries.
  • It remains uncertain whether the recent emergence of negative narrow money velocity growth in the United Kingdom will prove to be permanent or temporary. Further financial innovations are likely to make a positive contribution to narrow money velocity growth.

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