Journal of FinTech and Sustainable Finance

Articles

Vol. 1 (2025)

The Dynamic Model, Based on the Quantity Theory of Money Plus the Velocity of Money Circulation: Factor Analysis of the Inflation in USA During 1960-2024

DOI:
https://doi.org/10.31875/2755-8398.2025.01.09
Submitted
December 5, 2025
Published
2025-12-05

Abstract

The model for factor analysis of inflation is presented and applied to the inflation in USA during 1960-2024. GDP deflator is decomposed into three growth rates: M2, velocity M2V and real GDP. The subject is impact of money supply and velocity to the CPI and GDP deflator. As a result – the dynamic model is proposed for the factor analysis. Some results of regressions are exposed to check relations between CPI, GDP deflator and those factors. The scientific novelty – the velocity of money circulation may play key role in inflation. Velocity depends on two basis trade-offs: expected risk and return on deposits and expected risk and return in financial markets. Velocity is generally stable and tends to decrease when inflation factors are anchored.

When a central bank control prime rate and ignore money supply, the market price for capital is distorted. Then three factors may come into play: an increase in inflation expectations due to increase of money supply; an increase of the money velocity due to inflation expectations; a decrease of real GDP growth due to a high prime rate. All three factors accelerate inflation and all are ignored by New Keynesian models, currently employed by central banks. Therefore, it is proposed to improve management of inflation by replacing the New Philip’s curve with the factor model based on money supply, money velocity and real GDP growth.

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