• Readers of these Comments will have noticed that we regularly use Irving Fisher’s famous equation of exchange: nominal GDP equals the money supply times the velocity of money. While the equation of exchange is a truism and, on the surface, useless because it doesn’t tell us anything about cause and effect, that changes when we start making assumptions. The assumption analysts, economists and central bankers often make is to assume the velocity of money to be broadly stable. If velocity is stable, then changes in nominal GDP are purely the result of changes in the money supply. And unlike velocity, the money supply is a predictable variable.


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