Federal Reserve Economic Data

The takeaway

The velocity of money is how fast money travels from one entity to another to purchase goods and services in a given period. Since 2008, velocity in India has been closing the gap with velocity in the US.

The invisible pulse of the economy

Economists often rely on what can be directly measured to understand the economy. Examples include the unemployment rate or how much output an economy produces. Less-visible or “indirectly observed” metrics can also reveal insights about the economy. These types of metrics can provide information on economic activity that adds to information provided by direct measurements, such as GDP.

The velocity of money is one of these indirect metrics. It is the rate at which money travels from one entity to another—that is, the number of times a unit of currency is used to purchase goods and services in a given period. Although it cannot be observed directly, it can be computed as the ratio of nominal GDP to the money stock. High velocity indicates an active economy, while low velocity indicates a stagnant one.

Our FRED graph above illustrates the velocity of money in two economies, the United States and India, from 2004 to 2019. And the graph tells a clear story. In 2004, money in the US was circulating twice as fast as that in India: A US dollar was used about 2.6 times to purchase goods and services, whereas an Indian rupee was used 1.3 times.

A notable shift began around the first quarter of 2008, near the onset of the Great Financial Crisis: US velocity started to decline. By the fourth quarter of 2019, US velocity had fallen to 1.6, reflecting a slowdown in economic activity, while India’s stood at 1.35.

How is velocity measured?

These two economies use a monetary aggregate called M1 to represent the stock of money that can most easily be used for transactions. Typically, it consists of cash in circulation and deposits in checking and savings accounts. M1 in both countries currently includes deposits in savings accounts, but India’s M1 has done so for a longer period of time, since their savings accounts have been regularly used for everyday payments.

M1 in the US didn’t include savings deposits until 2020. A change in regulation in 2020 made the deposits in savings accounts a part of M1. So, for an apples-to-apples comparison of velocities, we add savings deposits to US M1. This gives us a harmonized metric to compare the pulses in the two economies.

How this graph was created: Search FRED for and select the seasonally adjusted series for “Gross Domestic Product” and click “Edit Graph.” In the “Edit Line” tab, use the “Customize data” field to search for and select the seasonally adjusted series for “M1” (click “Add”) and “Savings Deposits: Total (DISCONTINUED)” (again, click “Add”). In the formula field, type a/(b + c) and select “Apply Formula.” Click the “Add Line” tab and search for and select the seasonally adjusted series “National Accounts: GDP by Expenditure: Current Prices: Gross Domestic Product: Total for India” and click “Add.” Using the “Edit Lines” tab, in the “Customize data” field, search for and select seasonally adjusted series for “Monetary Aggregates and Their Components: Narrow Money and Components: M1 and Components: M1 for India” and click “Add.” In the formula field, type a/b and select “Apply Formula.” Finally, select “2004-01-01” to “2019-12-01” as the time frame.

Suggested by Kritika Chakrabarti, B. Ravikumar, and Debargha Som.

How does economic uncertainty affect the economy?

Uncertainty about economic policy can shape the decisions of households and firms. When the policy environment becomes less predictable, for example, households and firms may adjust their spending and investment behavior. This post looks at how uncertainty co-moves with consumption, investment, and output in India.

Our first FRED graph, above, does show a negative relationship between economic policy uncertainty and the growth rate of consumption in India. That is, periods of higher uncertainty tend to coincide with weaker consumption growth. One plausible mechanism may be that higher uncertainty encourages households to postpone discretionary spending, increase precautionary savings, and delay major purchases.

How do we measure uncertainty?

The Economic Policy Uncertainty (EPU) Index for India, shown in the graph by the solid blue line, is constructed by tracking the frequency of newspaper articles that discuss policy-related economic uncertainty. Specifically, the index draws on major publications in India and counts articles that jointly reference terms related to uncertainty, the economy, and policy (such as regulation, fiscal policy, and central banking). These counts are scaled by the total number of economic policy uncertainty articles in each newspaper and then normalized to ensure comparability across sources and over time. The index is set to have an average value of 100 in the pre-2011 period. Higher values of the index indicate greater policy-related economic uncertainty, while lower values indicate relatively more stable and predictable policy conditions.

The EPU Index is available at a monthly frequency. Since the growth rates of consumption, investment, and output are reported quarterly, the EPU index is aggregated to the quarterly frequency to ensure consistency.

Our second FRED graph, above, shows another negative relationship—this time, between the EPU Index and investment growth in India. That is, higher policy uncertainty is associated with slower investment growth. It may be the case that higher uncertainty induces firms to delay irreversible investment decisions and wait for clearer policy signals.

A similar negative relationship holds between EPU and real GDP growth. This pattern is consistent with the mechanisms described above: When households defer consumption and firms postpone investment, aggregate economic activity slows down.

Overall, higher EPU is consistently associated with weaker consumption, investment, and GDP growth. While these are simple correlations, they suggest that policy uncertainty dampens economic activity.

How these graphs were created: For the first graph, search FRED for and select the series “Economic Policy Uncertainty Index for India” and click “Edit Graph.” Modify the frequency to “Quarterly” and the aggregation method to “Average.” Then open the “Add Line” tab and select the series “National Accounts: GDP by Expenditure: Constant Prices: Private Final Consumption Expenditure for India” (series ID: NAEXKP02INQ189S). Set units to “Percent Change from Year Ago” at a “Quarterly” frequency. Then click on “Format,” choose line 2, and use dotted / red for line style. Set Y-axis position to “Right” and close the panel. Set the date range to 2003-01-01 to 2023-07-01. For the second graph, repeat the same exercise substituting the consumption series for gross fixed capital formation.

Suggested by Bishmay Barik and B. Ravikumar.