What are the determinants of velocity of money in Fisher's equation ? How does it differ from the Cambridge version of velocity of money?
In Fisher’s Equation of Exchange (MV = PT), velocity (V) is viewed as institutionally determined and relatively stable in the short run. It reflects the average number of times money is spent on final goods and services within a period. Its key determinants are institutional factors such as the frequency of income payments (weekly vs. monthly), development of banking and financial instruments, efficiency of clearing systems, and community habits regarding the use of cash versus credit.
In contrast, the Cambridge version (M = kPY) treats velocity, implied as (1/k), as less stable and influenced by individuals’ portfolio decisions. Here, k represents the fraction of nominal income people prefer to hold as money. Determinants include interest rates (opportunity cost of holding money), overall wealth, expectations about future prices and returns, and the convenience or security of holding cash.
Thus, Fisher emphasizes transactions velocity, while Cambridge highlights income velocity.
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