By Kathryn Grant, Gertjan Vlieghe and Andrew Brigden of the Bank's Monetary Assessment and Strategy Division.
It is widely accepted that the introduction of cash-saving technologies, such as credit and debit cards, and the growing network of automated teller machines (ATMs) contributed to a prolonged upward shift in narrow money velocity towards the end of the 20th century. This article considers whether this upward shift might plausibly have come to an end. First, it presents data on four distinct manifestations of financial innovation, and asks whether the pace of change in each might have slowed. Second, it uses time-series data stretching back more than 100 years to present estimates of the demand for narrow money during different time periods. It finds tentative evidence that, since the early 1990s, narrow money velocity has been a broadly stable function of the short-term rate of interest.