Velocity of Money
The rate at which money circulates through the economy — how many times a dollar is spent in a period.
What is Velocity of Money?
The velocity of money measures how frequently a unit of currency changes hands in a given period. It is defined by the quantity theory of money: MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real output (GDP). If the money supply doubles but velocity halves, the price level and output remain unchanged. Velocity tends to rise during economic expansions (money changes hands more frequently) and fall during recessions or financial crises (people and banks hold cash rather than spend or lend). Declining velocity can mean that increases in the money supply have little inflationary effect — as happened after the 2008 financial crisis and during COVID-19.
Example
After the 2008 financial crisis, the Federal Reserve tripled the monetary base through quantitative easing. Despite this, inflation remained subdued because the velocity of M2 money fell sharply — from about 1.9 in 2007 to roughly 1.1 by 2020 — as banks held excess reserves and households and businesses reduced spending.
Source: Federal Reserve Bank of St. Louis FRED — M2 Velocity