What is Income Velocity of Money

The aim of the chapter is to introduce money as the necessary link between micro and macro levels. The author starts with a critical appraisal of the neoclassical monetary theory paradigm. The opening argument is that it is not possible to separate the relative prices and price level formation. The interdependence between the price of money and the prices of all the other goods leads to the conclusion of the gross complementarity of money what violates the gross substitutability principle. Further, it is argued that the function of money as medium of exchange in a decentralized monetary economy is only possible under cyclic sequencing of bilateral exchanges. The latter means that new macroeconomic constraint is added to the conventional micro equilibrium requirements. The macro constraint makes possible to derive the individual utility functions from macro variables such as the income velocity of money and the price level. The macro constraint allows also for optimal solutions under the second-best conditions.