Friedman's Velocity?

Picking up from Velocity and Inflation?... another interesting take on "velocity" from Yi Wen and Maria A. Arias at the St. Louis Fed, where they much like Hamilton and Chen, pick at Friedman's equation MV = PQ.

M stands for money. V stands for the velocity of money. P stands for the general price level. Q stands for the quantity of goods and services produced.

According to this view [Friedman's equation], inflation in the U.S. should have been about 31% per year between 2008 and 2013, when the money supply grew at an average pace of 33% per year and output grew at an average pace just below 2%. 

So we know from Hamilton and Chen, and the math above, that increases in money supply do not necessarily correlate with inflation rates, or nominal GDP (output). So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP?

the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP (either P or Q).

QE failed to increase "advertised" consumer inflation and nominal GDP by muting velocity, but why did velocity decline?

the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).

Indeed "abnormal" monetary policy or "there is something is this more than natural" QE, ZIRP and NIRP pursued to excess do reinforce constrictive conditions, viz a tightening. But how does this  "stimulating the private sector’s money demand " manifest?

"The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money, " 

Again as mentioned in our last missive, important and something we will revisit: "hoard money instead of spend it... increase in money demand has slowed velocity".

Liquidity preferences led to hoarding, which increased demand for money, and caused velocity to tank? Sound's Keynesian, but wait remember what Hamilton and Chin wrote in 2010????

The demand for reserves has increased by a trillion dollars since 2008. The demand for currency held by the public has not. 

So are both Hamilton - Chin and Wen - Arias right? Or is somebody wrong or have they missed something? More important, how might lower velocity or the turnover of money effect the economy?

When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink.

Take aways? Wen and Arias briefly touch upon something critical in liquidity preferences, hoarding and then transactions velocity or the turnover of money, but go no further down the path. 

We are left with questions, [a conflict between Hamilton-Chen and Wen-Arias] regarding demand for money, did it or did it not increase?  Also regarding the total volume of transactions, more means velocity increases and the economy is likely to expand?  Is this always true? 

At the end of the day, much like Hamilton and Chin, Wen and Arias see the resultant pattern, have grasp of a piece of the puzzle, but for limitations in scope, do not fully address the underlying causes and potential consequence.

More to come in The Irrelevance of Velocity?, stay tuned and no flippin.