The speed of circulation of money lies in the intensity of its movement. To correctly analyze the speed of money turnover, you need to pay attention to some of the nuances of this concept in the modern financial sphere. Along with this term, the closely associated term “money supply” is used. In this context, money is viewed as a means to achieve certain goals. This indicator measures the number of transactions. Accordingly, in these transactions the immediate operating unit is money. The time period must be at least a year. A high rate of cash turnover is an indicator of relatively rapid expenditure of funds and high market conditions (market activity). Also, the high circulation speed reduces the need for additional emission (printing new money). But there is also a negative reason for the high speed of money turnover - distrust in the national currency and the rapid desire of market participants to get rid of it. The slow circulation of the money supply indicates a low coefficient of placement of the national product. But there may also be a positive reason for the slow turnover of funds - this is the desire of market participants to save the money supply in long-term bank deposits. Which in turn is caused by confidence in the national currency and its value. The amount of money supply is inversely proportional to money circulation. Below the formula, methods for adjusting the speed of cash turnover will be discussed. With the development of economic progress thanks to electronic payments, the speed of money circulation has become more stable than before. The goods were always tied to money, and the distance of the same trade routes was relative. For example, merchant ships, with a good tailwind, could cover a distance in a week that would take months to sail under normal weather conditions. On land, war and weather conditions were also often obstacles. In those days, indicators of the rate of turnover of the money supply fluctuated much more often. There are facts in history when, after trading in ports, entire cities were left without cash coins. There was nowhere to borrow them at any interest rate.

Formula for calculating the speed of money circulation

The concept of money circulation implies the number of turnovers of the entire mass of monetary resources per year. This value is often calculated indirectly: the total number of transactions divided by the volume of money supply in circulation. To determine the speed in government monetary circulation, you will need the following formula:

1. Number of Turnovers created by money circulation:
   • KO = GDP / M (Money supply);
2. average duration of money supply turnover:
   • PO = M: GDP / D (Calendar days);
3. the obtained indicators are proportional:
   • KO = D/PO or PO = D/KO.

In the speed of circulation of money, one can highlight its main indicators. This group includes:

1. The speed of national currency turnover in the cash desks of central banks.
2. The speed of flow of cash in circulation.

The first indicator comes from the ratio:

• amounts received at the cash desks of the country's main bank;
• funds in current bank accounts;
• average indicator for the year for cash flows that are in circulation.

The second indicator displays the values ​​of cash flows, which correlate with each other:

• A) the amount of money issued through central cash desks;
• B) the average annual mass of monetary resources in cash circulation.

Of course, such an indicator as the speed of circulation of money is carefully controlled at the state level. After all, this parameter predetermines the financial capabilities of a particular state. Without indicators of the speed of payment flows and money, it is impossible to make any preliminary financial calculations for the future development of the state. When calculating the speed of circulation of the national currency, we must not forget that this is an average indicator. This means that some deviations are possible, but minor. Another important point: the money turnover rate shows the number of times per year that a monetary unit is used to purchase goods or services. This parameter is in some way indicative of obtaining a real picture of the “solvency” of the population. In other words, the velocity of money flow refers to the frequency of use of a specific monetary unit per year.

Regulation and control over the speed of cash turnover

The speed of money circulation is regulated in the following ways:

• analysis and accounting of the banking sector;
• regular control of cash flows;
• reserve funds of banknotes and coins are created;
• implementation of rules for storage, transportation and collection of national currency;
• Banknotes are regularly replaced and destroyed;
• rules for cash transactions are determined and introduced.

The issue of money, as well as the reverse process - the withdrawal of currency from circulation - is subject to state regulation. The entire monetary policy of any country is subordinated to this area. Regulation is carried out in accordance with state banking legislation. The speed of money turnover is directly related to the banking sector. These include:

• state banks;
• territorial branches of central banks;
• commercial banks of the state and foreign investors.

To simplify control over the speed of turnover of the national currency, territorial cash settlement centers are being created. They combine in their structure working cash registers and reserve funds with a reserve of banknotes and coins, which are not yet put into circulation, but only as needed. Cash desks accept and issue cash. There is a certain limit for currency balances. If the limit is too high, the surplus goes to the reserve fund. These funds are no longer in circulation.

Non-cash transfers – high-speed turnover of national currency

Today, an important role is played by the control and regulation of non-cash cash flows, which significantly increase the circulation speed of the national currency. When transferring funds from an account of one bank to accounts in another bank, transactions go through interbank intermediaries - Cash Settlement Centers. All RCCs are structural divisions of the state central bank. To transfer non-cash national currency, different forms are used:

• money orders;
• payment requirements;
• letters of credit;
• checks;
• collection operations.

Preferences for choosing forms for non-cash transfers are determined depending on the general economic situation in the state:

• inflation;
• nature of payment;
• financial reputation of counterparties.

The largest flow of non-cash transfers goes through:

• between organizations;
• enterprises and banks;
• government organizations and budgetary structures;
• between all types of organizations and the population.

It is prohibited to issue non-cash monetary forms. But it is important to understand that cash and non-cash funds are strongly interconnected. Any non-cash transaction begins with the deposit of cash into a bank account. Afterwards they appear on the credit accounts of counterparties, who can withdraw non-cash money through banks. For non-cash transactions, money is used exclusively in national currency. Non-cash transactions in foreign currency within the state are strictly prohibited, for obvious reasons.

The Euro currency was invented to make the sums of money turnover of the rich look several times more modest.

Under velocity of money refers to the average annual number of turnovers made by money over a certain period when purchasing finished goods and services, i.e. when servicing purchase and sale transactions. These transactions are serviced using both the M1 monetary unit , and the monetary aggregate M2 . Therefore, the velocity of circulation of money actually consists of the velocity of circulation of money itself, which has absolute liquidity, and deposits.

Thus, the following can be considered indicators of the velocity of money circulation.

1. An indicator of the velocity of circulation of money, calculated on the basis of the equation of exchange:

where V is the velocity of money circulation;

Y – nominal volume of the ENM;

M is the mass of money in circulation.

At the same time, it is known that GNP also characterizes the total volume of income and expenses in the economy, i.e. if we consider V as total income, then V is represented as the velocity of circulation of money in relation to income and shows the average annual number of owners whose income included the same monetary unit.

2. Indicator of the speed of circulation of funds of payment, those. the ratio of the amount of transferred funds from bank deposits to the value of the money supply.

The velocity of money circulation is calculated according to the Bank of Russia methodology for the M2 monetary aggregate using the formula

where GDP is the nominal gross domestic product for the analyzed period;

n – number of completely expired months;

– arithmetic mean of the monetary aggregate for the analyzed period.

The velocity of circulation of the monetary aggregate M2 is defined as the ratio of GDP to M2 and has a dimension of 1/year. The reciprocal of the velocity of circulation characterizes the period of circulation of money.

The velocity of money circulation in the short term is usually a constant value; in the long term it varies, but only slightly.

Factors that change the velocity of money circulation are:

- rate of growth (decrease) in production volume– when the volume of production increases, the velocity of money circulation increases, when it decreases, it falls;

- economic cycle phases- during crises, the velocity of money circulation slows down. The slowdown in the turnover of money (at relatively stable prices) means that the coefficient of placement of the created national product has decreased. Thus, during the Great Depression of 1929–1933, the velocity of money circulation decreased by 40%. A high value of the velocity of money with relatively stable prices is an indicator of growth;

- inflation rate– in Russia, from 1992 to 1996, the mass of consumer goods and industrial goods decreased, and the velocity of money increased, i.e. prices rose faster than the money supply. In Russia, as a result of the inflation shock of 1992, the velocity of circulation of M2 increased greatly and money turned around in 1.5–2 months, which corresponds to the time it takes to sell goods on the consumer market.

Significant changes in the velocity of money circulation can be associated with qualitative transformations in the organization of money circulation, which occurs quite rarely and quite predictably (for example, the widespread use of ATMs, with the help of which you can get cash using special cards in any place where they are installed, or the widespread introduction of “plastic money”).

At the same time, when the same monetary unit - for example, 1 rub. - changes hands faster (the velocity of money increases), a person needs a smaller amount to pay for his transactions over a certain period of time. The monetary unit returns to him again and again, faster and faster, and his demand for money is reduced.

The velocity of money is a relatively stable value for every economy. It is determined by two main factors: the frequency of payment of wages to employees and the characteristics of consumer purchases. The more often wages are paid - for example, once a week, and not once a month, the faster the monetary unit enters the process of purchase and sale and the higher, therefore, will be the speed of its circulation.

Consumer behavior also affects the speed of circulation. It matters whether consumers spend their income in small portions (the circulation speed will be higher) or prefer to make large purchases at once, pay for goods and services in cash, checks or plastic cards, can use credit or are forced to always pay the required amount in full. Typically, the higher the income level in a country, the larger the typical consumer's purchases become. Therefore, a decrease in the velocity of money circulation can be considered as indirect evidence of an increase in the well-being of residents.

Question to think about

In country A, only cash is in circulation, and in country B, people still use plastic cards. In which country is the velocity of money circulation higher?

In addition, the rate of circulation of money is affected by the prevalence of vertical integration in the economy. With vertical integration, many exchange processes of product promotion are within the same company. A smaller amount of money is used here, since intra-company purchase and sale can occur on the basis of mutual offsets, without the use of cash. Therefore, the more developed a country's vertical integration network is, the higher the overall velocity of money circulation will be.

Problem illustrating the theory

It is known that the money supply in the economy M grows by 10% per year, and nominal GDP PY increases annually by 20%. Data on the economy are presented in the table (in billions of monetary units).

A. Calculate the velocity of money in each year.

B. Calculate how nominal GDP will change if the velocity of circulation remains stable over a number of years at the rate of 5 (turnovers of a monetary unit per year), and the money supply increases, for example, from 200 billion to 300 billion den. units

B. What happens to nominal GDP if the money supply increases by 20% per year and the velocity of circulation decreases by 30% over those years?

Solution

The speed of circulation of money is determined by the number of revolutions of a monetary unit over a certain period, since the same money constantly changes hands over a certain period, serving the sale of goods and the provision of services. Money supply is a set of purchasing, payment and accumulated funds that serves economic relations and belongs to individuals and legal entities, as well as the state. The money supply is an important quantitative indicator of the movement of money; its value depends on the amount of money in circulation and on the speed of its circulation.

Having calculated, taking into account the given changes, the value of the money supply M and velocity of money circulation V we will get the nominal GDP values ​​for each year. The results show that in dynamics, with the money supply growing by 20% per year and the velocity of circulation decreasing by 30%, nominal GDP initially decreases by 16% per year.

A. Let us determine the velocity of money circulation in each year (number of revolutions) using the Fisher formula:

The same result can be achieved directly based on the theoretical formula. Let's calculate the change in nominal GDP using a modification of the exchange equation:

Thus, based on the calculations made, we can conclude that under the influence of an increase in the supply of money by 20% per year and a decrease in the velocity of circulation by 30%, nominal GDP per year will decrease by 16%.

So, the speed of circulation is influenced by a wide variety of factors, from the technical conditions of the organization of production to the features of the monetary institutional structure of the economy. In table 3.1 contains key elements that must be taken into account when assessing the value and dynamics of this indicator of the monetary sector.

Table 3.1

Factors influencingV(money circulation velocity)

Payroll frequency	/gt=> Vi
Traditions (habits) of paying for purchases (cash, checks, bank cards)	cash => M T => V t
Inflation rate	P t=> Vi
Income effect (for example, as a phase of the business cycle)	Yi => Vi
Financial Innovation	cards t => V T
Current interest rate	i t => M D 1 => Vi
Interest rate expectations (optimistic or pessimistic)	i e *f> t => M D t => Vi
Degree of vertical integration in the economy	VIi=> M D i => vi
Presence and degree of development of credit relations in the economy	credit t => M D F => V t
Volume of the shadow economy: illegal activities, tax evasion (degree of law-abiding citizens)	Shadow-economy t => M t => V T
Wealth effect	wi=> ct => vi
Purchase formats ( expenditure patterns)	Qi=> m d i=> vi

Velocity of money characterizes the frequency with which each unit of money in circulation (hryvnia, dollar, etc.) is used on average for the sale of goods and services for a certain period (year, quarter, month).

Based on the well-known exchange equation of I. Fisher, the value of the velocity of money circulation can be determined by the formula:

Where V- velocity of money circulation;

R average price level for goods and services;

Q is the physical volume of goods and services sold in a certain period;

M the average amount of money in circulation over a certain period.

Thus, the value of the velocity of money circulation is directly proportional to the nominal volume of the manufactured national product (P x 0) and inversely proportional to the volume of money in circulation.

Characterizes, first of all, the intensity of use of the stock of money in circulation (M) to pay for goods and services sold, that is, this indicator is associated primarily with monetary circulation. Therefore, the value of V depends primarily on the frequency and volume of commodity transactions of each subject of monetary turnover. However, non-commodity payments (fiscal, credit) also affect the rate of circulation. This influence is especially noticeable in the average duration of one hryvnia revolution. It consists of the duration of storage of money at the disposal of direct buyers in product markets, as well as the duration of its stay at the disposal of fiscal institutions, banks and other financial and credit institutions, through which part of the national income is distributed and redistributed as the main source of formation of payment demand in the markets . If this second group of subjects of turnover retains money at its disposal and does not make payments on its obligations on time, then the duration of this part of the circulation of money will increase and the entire speed of its circulation will decrease.

The velocity of money circulation indicator can be determined:

o by the average frequency of use of the monetary unit in paying for the income of the population, that is, in the formation of national income;

o by the average frequency of use of a monetary unit in making all types of payments;

o by the frequency of cash passing through bank cash desks.

The first of these indicators can be determined by dividing the volume of national income by the amount of money in circulation. Quantitatively, it almost coincides with the indicator V, certain GDP. The second of them can be determined by dividing the total volume of money turnover by M. This indicator differs significantly from the V indicator determined by GDP, because it will take into account all non-commodity payments (fiscal, credit, speculative, etc.). Since official statistics do not determine the total volume of money turnover, it is almost impossible to calculate this indicator V. The third indicator can be determined by dividing the total volume of cash turnover of all commercial banks for the year by the average annual amount of cash in circulation.

The speed of circulation of money is influenced by many factors with multidirectional effects. All of them can be divided into two groups:

=> Those that act on the side effective demand;

=> Those that act on supply side of goods and services.

Among the factors first group the main ones are:

> Changes in demand for money;

> Development of consumption structure;

> Cultural needs of the population and the like. The main factors of the second group:

> Social production;

> Market relations;

> Market infrastructure and the like.

Change in demand for money turns out to be a change in the desire of economic entities to have at their disposal a certain supply of money as highly liquid assets. If such a desire increases, then the expenditure of money will be less intense than its receipt and money turnover will slow down. And vice versa, if the demand for money decreases, then its spending will be more intense upon receipt, and money circulation will accelerate. Therefore, the velocity of money circulation and the demand for money can be considered as two interrelated indicators with an inverse relationship.

The influence on the speed of circulation of money from the side of the commodity supply is determined mainly by the intensity of the economic processes that it serves: changes in the volume, structure and efficiency of social production, the magnitude and speed of commodity flows at the exchange stage, the development of market relations, market balance, etc. Increased efficiency social production shortens the period of accumulation of value for the purposes of reproduction, accelerating the return into circulation of money serving the purposes of accumulation within individual individual capitals. The development of credit relations and the banking system is of great importance in overcoming the restraining influence of monetary savings on the circulation of money. Thanks to it, even insignificant accumulations of money are again directed into the sphere of circulation, accelerating their movement within the circulation of all social capital.

The development of economic infrastructure has a certain impact on the speed of money circulation: transport, trade (wholesale and retail), banking (in particular the automation of non-cash payments), the securities market, etc. Improving business in each of these areas helps speed up the delivery of goods from the seller to to the buyer and transfer of money from the payer to the recipient.

The speed of circulation of money, like its mass, affects economic processes not by its absolute value, but by its change over a certain period - acceleration or deceleration.

Change in velocity of money has significant economic consequences: increases or reduces the supply of money in circulation and this affects effective demand and circulation costs; complicates or facilitates the regulation of monetary circulation; gives a general display of changes in the intensity of economic processes that form the basis of money circulation. A change in the velocity of money circulation affects effective demand in direct proportion: when it increases, provided that trade turnover remains constant, effective demand increases relatively, and vice versa. The acceleration of the circulation of money compensates for its mass, and can have a positive effect in conditions of increasing trade volumes, when the growing need for money will be satisfied without additional issuance. However, if the economy is unbalanced, when effective demand outstrips commodity supply, the acceleration of money circulation becomes an additional inflationary factor.

The slowdown in money circulation expands the capacity of its sphere, that is, it increases the demand for money and reduces effective demand, which has a positive effect on its condition even if the volume of trade turnover remains unchanged. Therefore, measures to slow down money circulation are always included in anti-inflationary programs as their component, and the economic situation, characterized by a slowdown in money circulation, is favorable for reforming the country’s monetary system.

Velocity of money circulation - the phenomenon is objective, extremely complex, difficult to predict and regulate. Therefore, practice has not developed effective tools for operational regulation of the speed of circulation of money to influence market conditions. Being inversely related to the demand for money, the velocity of money is as sensitive to changes in interest rates as the demand for money. Since the level of interest constantly and significantly fluctuates, the velocity of circulation of money, according to Keynes, also constantly and unpredictably changes. M. Friedman, the founder of modern monetarist theory, followed Keynes in recognizing the ability of the speed of circulation of money to fluctuate. However, he disagreed with Keynes regarding the impossibility of predicting them, which gave him grounds to restore the priority role of monetary policy in state regulation of the economy. Anticipating changes in V makes it possible to neutralize its impact on the economy by adequately changing the mass of money in circulation.

(green curve). The M2 rate is unstable and correlated with the employment rate of working-age people (blue curve), which is an indicator of the vitality of the economy. Both the M2 volume and the indicated level decrease during periods of recession (marked with gray bars). The pattern contradicts the quantity theory of money, whose proponents argue that the velocity of money is stable and determined by the market environment only to a small extent.

A similar graph showing the dynamics of the circulation velocity of the smaller unit M1 (cash + demand deposits + checks + electronic money).

A similar graph showing the dynamics of the circulation speed of the larger aggregate M3 (M2 + large time deposits). The US no longer publishes M3 measurements, so the data shown is up to 2005.

Velocity of money(English) velocity of money, velocity of circulation ) - the average frequency with which a monetary unit is used to purchase new domestic goods and services over a certain period of time. The velocity of money circulation largely depends on the volume of economic activity for a given money supply. If the time period is stated, the speed can be presented number. Otherwise, the indicator must be specified in the form number per time period.

Example

Let's imagine a small economy with a money supply of $50. The farmer and the mechanic - the only economic agents - trade with each other and make three transactions per year:

• A farmer spends $50 to repair a tractor.
• A mechanic buys $40 worth of grain.
• A mechanic pays a farmer $10 to keep his cats.

The total value of the transactions is $100 with a money supply of $50. This situation was possible because every dollar was spent on average twice per year. Therefore, the velocity of money circulation in this case is per year. Note that if the farmer were to purchase a used tractor or donate grain to a mechanic, these actions would not affect the value of the circulation rate. When calculating speed, only those transactions are taken into account that are also taken into account when calculating GDP.

Indirect measurement

In practice, indirect methods for measuring circulation speed are usually used:

- speed of money circulation for all transactions; - the amount of transactions in nominal terms; - money supply.

(guided by the principles of classical dichotomy, can be represented as the product of the price level and the real total cost of transactions)

When studying a specific economy, the cost of final output is of interest. The following relation can be written:

- speed for transactions taken into account when calculating the national or domestic product; - nominal national or domestic product.

(as in the case of , according to the classical dichotomy it can be calculated as the product.)

Determinants

The views of representatives of various scientific schools on the determinants of the velocity of money circulation vary. Proponents of the quantity theory argue that in the absence of inflationary (deflationary) expectations, the rate will be stable. Inflationary expectations cannot arise without a signal that general prices have changed or will change. This view was refuted by the sharp decline in the velocity of circulation during Japan's "lost decade" and the worldwide recession of the late 2000s. The authors of monetary policy undertook a massive expansion of the money supply, but instead of an increase in nominal GDP, as the theory predicted, there was a fall in the velocity of circulation. Nominal GDP remained almost at the same level.

Some people mistakenly perceive the concept of velocity of circulation, believing that it represents the time period between receiving income and spending it. The size of the share of income spent on consumption partly determines the volume of GDP, but when exactly the spending occurs is not significant. People can make large expenses long after receiving income by storing it in non-monetary forms (stocks, bonds).

Paul Samuelson commented on the thesis about the constant velocity of money circulation as follows:

Guided by the provisions of the quantity theory of money, we can say that the speed of circulation of money does not remain unchanged. “You can lead a horse to water, but you cannot force it to drink.” You can throw money into the system by exchanging it for government bonds, a close analogue of money; however, you cannot force money to circulate among new goods and services.

Criticism

Libertarian representative Henry Hazlitt criticized the concept. In his opinion, the model equation does not take into account psychological effects that play a significant role in the evaluation of money. As an example, he showed that during periods of inflation, when new money is just emerging, the rate of increase in the price level is less than the rate of growth of the money supply. However, after some time, the price level increases in a much greater proportion than the mass of money. Hazlitt argues that the cause of this phenomenon lies not in changes in the velocity of money, but rather in divergence in the actions of individuals caused by "fears ... that inflation will continue in the future and the value of the currency will fall further." The economist proposed an alternative to the quantity theory of money and the concept of the velocity of money as its inevitable consequence. He explains that the money supply changes the amount of money that the population holds in cash, and not the velocity of circulation. It is not the speed of circulation that determines the value of a currency, but the sum of individual valuations of a currency that determines the speed.

Notes

Literature

• Kramer, J. S. “velocity of circulation”, (1987), v. 4, pp. 601-02.
• Friedman, Milton; “quantity theory of money”, in The New Palgrave: A Dictionary of Economics(1987), v. 4, pp. 3-20.

Links

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See what “Velocity of Money Circulation” is in other dictionaries:

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circulation speed- (money) The rate at which the money supply is spent means how many times one dollar is spent in a given period of time. The concept of income velocity of money was first explained by economists Irving Fisher. Financial and investment explanatory dictionary