Even though CIC expanded, income velocity of money
, or the rate at which we spend money, plunged, indicating that it isn't getting adequately circulated.
"The Long Run Behavior of the Income Velocity of Money
in Five Advanced Countries, 1870-1975: An Institutional Approach." Economic Inquiry, 19(1): 96-116.
However, it has also been proved that quantity theory of money is not applicable in Pakistan along with unstable income velocity of money
, which casts doubt on the use of monetary aggregates targeting (Omer and Saqib, 2009).
Besides, since the income velocity of money
is defined as the speed with which money changes hands, then it is likely that the behavior of the firm and agent must be more explicitly expressed in the equation of exchange as consumption and firm behavior would change when the price level, income, money or the interest rate change in the economy.
As noted above, Friedman championed his approach on the empirical grounds that the income velocity of money
, emphasized by the quantity theory, was historically more stable than the relationship between investment (autonomous expenditures) and income, emphasized by Keynesianism.
The money supply determined out side the system that is it is exogenous, income velocity of money
is independent of the other variables in the identity (1), Y is real income.
The income velocity of money
is defined as income divided by a particular monetary aggregate.
First, the money supply is already increasing at a higher rate than the production potential plus the change in the income velocity of money
plus the allowable level of the increase in the price level.
The decline in the income velocity of money
during the 1980s is proof that the long recovery was not a Keynesian demand phenomenon.
The difference between the two was multiplied by the product of income velocity of money
gave that gave the extent of the underground economy.
"Predicting the Income Velocity of Money
: A Kalman Filter Approach," unpublished manuscript, Erasmus University (Netherlands: June 1991).
Where P is the price level, M is a monetary aggregate, V the income velocity of money
and Y is output at constant prices.