Velocity of Money

Economics

Velocity of money is how rapidly money changes hands in the economy — measured as GDP divided by money supply (M2). High velocity = active spending and circulation; low velocity = hoarding and slow economic activity. US velocity has declined dramatically over the past 20 years: from 2.0 (1990s) to 1.1 (2024). Declining velocity has partially offset the inflationary impact of rapid money supply growth. Fisher's equation (MV=PQ) relates money supply, velocity, prices, and output — explaining why money supply growth alone doesn't predict inflation accurately. Modern Monetary Theory and traditional monetarism disagree on velocity's significance and predictability.