Money, Banking If velocity were predictable but not constant, would a monetary policy than fixed the growth rate of money work?

3 Answers

belarafon's profile pic

belarafon | (Level 2) Educator Emeritus

Posted on

Remember that this is only a theory. In reality, the growth and velocity of money is so random and based on so many different factors that there is no way to predict its movement. A real-world monetary policy that fixed the growth-rate of money would inevitably end in high inflation as low economic growth years continued to create new, unbacked money.

accessteacher's profile pic

accessteacher | High School Teacher | (Level 3) Distinguished Educator

Posted on

This is one of the central ideas behind what successful banks and business try to do. They try to map out changes in factors such as velocity in order to plan their use of money to maximise profits. In theory, in a perfect world, what you suggest should work.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

In theory, it should.  The central bank (which would presumably be regulating the money supply) would know how the velocity would vary.  It could then fix the growth rate of money at the proper level and be confident in the results.  Certainty is generally a good thing in economic planning.