Measuring the Velocity of Money

Carolina E. S. Mattsson, Allison Luedtke () and Frank W. Takes

Papers from arXiv.org

Abstract: The velocity of money is an important driver of inflation that is conventionally measured as an average for an economy as a whole. While easy to calculate from macroeconomic aggregates, such measures overlook possibly relevant heterogeneity between payment systems, across regions, and intrinsic to spending patterns. This paper proposes a new measurement methodology that leverages large-scale micro-level transaction data and modern computational techniques to measure the transfer velocity of money at the level of individual spenders, enabling comparison between subgroups. Notably, our definition of transfer velocity extends to payment systems where users are free to deposit and withdraw, even as the total balance fluctuates. This is a common feature of real-world payment systems that is not accounted for by previous approaches. We estimate the transfer velocity of Sarafu, a digital community currency in Kenya, using a newly available data set describing individual transactions over a period of time that includes the COVID-19 pandemic. Our analysis reveals distributional, temporal and geographical heterogeneity in spending patters. Some units of Sarafu are held for minutes, others for months. The system experienced dramatic changes in its total balance and in its average transfer velocity as the COVID-19 pandemic unfolded, and in response to known administrative operations. Moreover, transaction rhythms differed substantially between rural and urban areas, in particular, money moves faster in urban communities. Successful macroeconomic policies require understanding how individuals experience the economy and when those experiences diverge. The data-driven approach described in this paper improves our understanding of the heterogeneity underlying macroeconomic indicators, and represents an advance in measurement that stands to improve economic monitoring.

Date: 2022-09
New Economics Papers: this item is included in nep-cba, nep-mon and nep-pay
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