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December 1983

Why Does Velocity Matter?

Daniel L. Thornton examines the role that income velocity plays in monetary policy decisions and evaluates the problems that arise when monetary policymakers attempt to offset short-run fluctuations in velocity in order to stabilize the short-run growth of nominal income. Thornton explains that policymakers must be aware of the important difference between changes in the level of velocity and changes in its growth rate when choosing policy options. He discusses a number of factors that can produce either temporary or permanent changes in both these measures of velocity. He points out the difficulty in predicting such changes and the potential danger facing policymakers if they respond too quickly to them.