In this way, the link between the supply of money and its velocity may be broken.
At times of high inflation, policymakers may take the view that it is appropriate to slow the velocity of money, and one of the ways this can be achieved is through higher rates acting as an incentive to save, not spend.
Higher interest rates also may slow the pace of economic growth, increasing job insecurity and causing workers to hoard the cash they have, rather than spend it, and so reduce the velocity of money.
Governments can also either increase or slow the velocity of money via its own spending and tax policies.
Dall’Angelo says there has been a shift in governments' attitudes, with higher levels of spending in Europe and the UK, which may mean inflation remains higher in the years to come than it was in the years prior to the financial crisis, regardless of central bank action.
She says “For once, I am not as positive on the US and more positive on the UK and Europe, because it looks as though Biden’s spending plans in the US won’t happen.”
David Thorpe is special projects editor of FTAdviser
david.thorpe@ft.com
