§ Mr. Austin Mitchellasked the Chancellor of the Exchequer, further to his reply to the hon. Member for Grimsby, Official Report, 10 December 1979, column 437–8, concerning the relationship between money supply and prices, what he means by the long run; what evidence he has to substantiate his assessment that the velocity of circulation does not change very much in the long run; and if he will include in the Official Report a table showing in index form the changes in the money supply, velocity of circulation, prices and output between 1949–59, 1959–69 and 1969–79.
§ Mr. LawsonThe table requested is as follows
change but only that changes in money incomes over time are related to changes in money supply. Thus, some upward movement in velocity can be expected when the rate of inflation increases, and vice versa. Secondly, the comparison between any two years will depend on the changes in the stance of monetary policy over the period between them; a tightening of monetary policy will tend to be associated with increases in velocity. Thirdly, the comparison will also be 895W affected by the delay between a tightening of monetary policy and its impact. For example, a relatively restrictive policy in the last part of one decade might be expected to increase velocity, and to have only a limited impact on inflation until the first part of the next decade. Fourthly, institutional changes in the financial system and changes in private sector financial behaviour with increasing income might be expected to increase velocity over time.
The period over which a tight monetary policy might be expected to have its impact, and thus the period over which the velocity of circulation can be expected to be broadly stable, will depend on how quickly inflationary expectations adjust to the stance of monetary policy. Thus, the quicker it is realised that the Government's policies will bring down the rate of inflation, and the more moderate are the pay settlements concluded, the quicker will be the reduction in inflation.