Does Transaction Velocity of Money Work on GDP? An Empirical Study

The economy system is like that of human bodies. In human bodies, both the stock and the velocity of blood are very important. In the economy system, the stock of money and its velocity have the analogous positions. But in the development of the monetary economics, economists have devoted more efforts into the stock of money, while the velocity is put in a less important place and, moreover, most of studies, theoretically and empirically, treat the velocity of money as income velocity. Under this condition, money is considered as store of value. However actual velocity of money is not the income velocity, but the transaction velocity. In this paper, I present why actual velocity of money is transaction velocity and test if transaction velocity of money works on GDP. The paper has four parts: review of theories on monetary velocities, comments on theories discussed above, model and estimate and conclusion. In the first part, four famous representative economist's theories are presented. They are Fisher, Pigou, Keynes and Friedman. The strong- points and shortcomings of these theories on velocities are analized in the second part. This part also puts forward my views of velocities. The third part is model and estimate. In the single regression model, I adopt the transaction version of quantity theory popularized by Irving Fisher, but jump out of Fisher's theory framework to make a test that if transaction velocity of money works on GDP. The last part is a conclusion of the paper. I conclude that, in U.S.A., transaction velocity of money has a positive effect on nominal GDP and that further study on this field should be recovered and pushed forward