Money Growth Research Articles

MONEY PRICE CAUSALITY AND THE ROLE OF FINANCIAL CRISIS

Quantity Theory of Money is subject to many critiques. One major critique is that it does not provide causal relation between money and prices. It generates a direct and proportional relationship between money and prices. If we causally link money and prices, then it could be argued that monetary growth is not always inflationary. To test this argument, we have selected quarterly data of the U.S economy over the period of 1991 to 2011. We have divided the time series into -periods i.e., normal times {1991 to 2005} and crisis period {2006 to 2011}. Over these sub-samples, the study applied different econometric techniques like Ordinary Least Square (OLS), Autoregressive Distributive Lag Model (ARDL) and Johansen co-integration as per the requirements. In the normal time period, money growth and CPI inflation were not related, but it was directly related to HPI inflation. However, it was inversely related to both inflations in crisis times. Quantity theory relates money with the general price level of the economy. The joint price index of consumer goods and asset prices is the better proxy of a general price index. Finally, monetary growth is directly related to joint inflation in normal times and inversely related to crisis periods. Hence monetary growth is not always inflationary; it could be deflationary under some specific circumstances. Key Words: Quantity Theory of Money, Inflation, Time Series Data, Co-integration, Price Index.

Fiscal Dominance and the Inflation Dynamics in Pakistan: An Empirical Analysis

The presence of high inflation coupled with a persistent and ever-increasing fiscal deficit is the key problem being faced by the developing economies. The fiscal dominance hypothesis suggests that a developing economy is prone to high persistent inflation when government authorities run huge persistent budget deficits and get them financed through money creation. The primary objective of the current study is to test and examine the presence of the fiscal dominance situation over the period 1971–2020. The current study has modelled inflation as a fiscally driven monetary phenomenon by combining monetary and fiscal variables. The study has used the autoregressive distributed lag (ARDL) technique to analyse the long-run and short-run dynamics in a unified framework. The empirical results point to strong and statistically significant long-term relationships between budget deficits and money growth and between money creation and inflation. The study validates the presence of the fiscal dominance hypothesis in the case of a developing economy. The results imply that fiscal dominance handling through a realistic and continuous process of fiscal adjustments on the back of supported monetary policy is necessary for attaining and sustaining price stability in developing countries like Pakistan. In the context of public finance, a broad and wide-ranging tax reforms (increasing the tax base, designing an inflation-proof tax system, and improving tax administration and collection), rationalized government expenditures and privatization of loss-making state enterprises are crucial in establishing the trustworthy fiscal policy.

Monetary policies and Islamic mutual fund flows: evidence from Islamic republic of Iran

PurposeThe main purpose of this study is to analyze the impact of monetary policies on Islamic mutual fund flows in the Islamic Republic of Iran.Design/methodology/approachIn this study, a panel regression model was used to test the research hypotheses. The sample consists of 4,760 seasonality data and 119 Islamic mutual funds over ten-year period between 2011 and 2020. The dependent variable of the study is the cash flow of Islamic mutual funds and the independent variable of monetary policies includes the money growth rate, the liquidity growth rate, interest rate and inflation rate.FindingsBased on the results of the hypothesis test, all research variables including money growth rate, liquidity growth rate, interest rate and inflation rate have a negative and significant impact on Islamic mutual fund flows. These findings are consistent with the efficient market hypothesis and signaling theory.Research limitations/implicationsThis study has implication for policymakers, regulators and fund managers. The results show that the negative impact of monetary policies on Islamic mutual fund flows has a direct effect on the allocation decisions and investment strategies of Islamic mutual fund investors and managers. Also, the results of the research can reduce policymakers’ concerns about monetary policies and provide them forward-looking guidance policy.Originality/valueTo the best of the authors’ knowledge, this is the first study to empirically examine the impact of monetary policies on Islamic mutual fund flows in an emerging economy and provides a significant contribution to the literature of mutual funds.

Of votes and viruses: the UK economy and economic policy uncertainty

ABSTRACT This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the UK's economic policy uncertainty in the context of its departure from the European Union. We employ two Bayesian VAR models which account for the extreme observations in macroeconomic and financial time series resulting from the COVID-19 pandemic outbreak. We document a contractionary effect of an economic policy uncertainty shock on GDP growth, which is not present in a model which does not account for the COVID-19-related outliers. Additionally, we find that GDP growth is enhanced by Divisia monetary stimulus but hampered by increases in financial stress. The results from a stochastic volatility in the mean threshold model also uncover different dynamics of transmission of shocks between economic uncertainty and the indicators we study across high and low economic policy uncertainty regimes.

Democratic (crypto-)currency issuance

Can democratic currency issuance lead to welfare-optimal results/stable currency values? We explore (crypto-)currency issuance with flexible majority rules. With flexible majority rules, the vote-share needed to approve a particular currency issuance growth is increasing with this growth rate. By choosing suitable flexible majority rules, socially optimal growth rates can be achieved in simple settings. By adding a communication stage, in which agents can reveal their preferences for currency growth, the voting process can be ended in three rounds. With other procedures, one could even obtain the first-best solution in one voting round. Finally, we show that optimal money growth rates are realized if agents entering financial contracts anticipate ensuing inflation rates determined by these flexible majority rules.

The dynamics of money velocity

ABSTRACT The dynamic of money velocity has changed gradually, influencing how macroeconomic shocks affect money velocity. This paper examines the response of money velocity to the external shocks in a system of equations, where money velocity, real output growth, money growth volatility, expected inflation, and risk premium are jointly determined. The regime-switching behaviour of money velocity is then examined through a Bayesian threshold approach. The main finding suggests that money velocity drops significantly after negative output and expected inflation shocks, followed by a sudden increase. In addition, the regime-switching process distinguishes the deterministic and stochastic behaviour of money velocity.

The Recent Surge in Money Growth: What Would Milton Friedman Say?

The M2 money supply has grown by almost 40% since 2019. This number by itself raises the strong possibility that we have entered a new and remarkable era in United States monetary history. But what would Milton Friedman say?Friedman's most famous work, his Monetary History of the United States, co‐authored with Anna Schwartz, provides a narrative account of events that links volatility in the money supply to economic instability, particularly during the Great Depression of the 1930s. And many of his subsequent articles focused on the role played by excessive money growth in generating the inflationary, boom‐bust cycles of the 1970s. An examination of these writings leaves little doubt that Friedman would be quite concerned about the recent surge in M2.Toward the end of his career, however, Friedman saw that the tight statistical links between money, output, and inflation that formed the basis for his lifetime's work had started to weaken. These same shifting correlations led other monetary economists and Federal Reserve policymakers to downplay the importance of changes in the money supply and to emphasize instead the role of interest rates in transmitting the effects of monetary policy to the broader economy.This paper takes a fresh look at the data, extended through the present, with the help of insights gleaned from Friedman's writings. It finds that when the sharp reduction in the velocity of money is accounted for, the historical relationships between money, output, and inflation that Friedman originally discovered reappear, even in the most recent data. These findings confirm what surely would be Friedman's concern: that unless the Federal Reserve moves decisively to wind down and reverse its large‐scale asset purchases and raise its target for the federal funds rate, higher inflation will persist.

On monetary growth and inflation in leading economies, 2021–22: Relative prices and the overall price level

AbstractFor most of the period since China started to reform and open its economy, falling goods prices in developed economies have been offset by rising service prices, but as a result of the COVID‐19 pandemic these relative price trends have been temporarily reversed. Separately from these relative price changes, the 2021–22 episode of inflation reflects broad money growth rates in many economies around the world since the start of the pandemic. The economies that are predicted to experience the greatest increase in inflation are those where monetary growth has increased most relative to the requirements to finance normal economic growth and the normal increase in demand for money balances (the inverse of income velocity).

Finance-Growth Nexus in Eastern and Southern African Countries: Insights from a Panel ARDL Analysis

This study analysed the finance-growth nexus for countries in the East African Community (EAC) and the Southern Africa Development Community (SADC). This was done an attempt to identify countries where Financial Sector Development (FSD) has the largest/least growth effect and the regional bloc moderation in such effect based on panel Error correction ARDL model. The aggregate data were obtained from the World Development Indicators (WDI) for a total of 14 countries, five (5) of which being in the EAC and the rest being in the SADC. The observations suggested that the regional bloc moderation effect transforms an otherwise insignificant effect of FSD on growth into a positive one specifically for broad money growth among the EAC member countries. This is a signal that a monetary union for EAC member countries could spur an overall welfare gain. Growth-finance nexus however, exhibited short and long run trade-offs in countries within the SADC. In the short run there have been significant GDP growth responses as a result of FSD but such effect turns out to be detrimental in the long run. As such difficult choices had to be made between addressing short run GDP volatility and achieving higher GDP growth in the SADC.

Balanced-budget fiscal rules and money growth pegging

This paper analyzes the interaction between monetary policy rule and distortionary balanced-budget tax policy rules on the stability properties of a one-sector Ramsey economy. The demand of money is motivated by a fractional cash-in-advance constraint on consumption expenditures. The monetary authority pegs the money growth factor while the fiscal authority uses a distortionary income tax or a distortionary consumption tax to balances its budget. Without or with distortionary taxes, we find a unique steady state and characterize its stability. The local stability of the unique steady state, when without distortionary taxes, depends on the interplay between the share of the liquidity constraint and the intertemporal elasticity of substitution of consumption. Regardless of the distortionary tax’s implementation, we demonstrate that the introduction of a balanced-budget rule, could promote or reduce self-fulfilling expectations, which depends on the amplitude of the liquidity constraint and the slope of the tax schedule. Monetary variables tend to reduce the likelihood of local indeterminacy while fiscal instruments tend to increase it when the slope of the tax schedule is positive. Finally, based on plausible empirical values, we present a simple numerical example considering countercyclical tax rates and show that, for both income and consumption tax rates, the introduction of balanced-budget fiscal rules could be stabilizing.

Impact of financial inclusion on the effectiveness of the interest rate channel of monetary policy transmission in West Africa

Monetary policy has been identified as an indispensable tool for macroeconomic stabilization. The transmission of monetary policy is conditioned on the effectiveness of the monetary policy intermediate targets of which interest rate, exchange rate depreciation and money growth are important. Many factors have been shown to affect monetary policy, of which, the role of financial inclusion is important. However, empirical studies on the relationship between financial inclusion and the interest rate of monetary policy transmission are few; as a result, this study examined the impact of financial inclusion on the effectiveness of the interest rate channel of monetary policy transmission in West Africa. In doing this, the study employed a panel dataset consisting of 15 West African countries for periods between 2005 and 2020. The data were from a secondary source, in particular, the World Bank’s World Development Indicator database. The analysis involves descriptive statistics and inferential analysis of the Generalized Method of Moments approach. The result of the generalized methods of the moment showed that financial inclusion improves the effectiveness of the interest rate channel of monetary policy transmission. Based on findings, this study recommends that policy authorities in West Africa should embark on a renewed commitment to ensuring access for all in West Africa.

Is money demand really unstable? Evidence from Divisia monetary aggregates

We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We investigate the long-term relationship between real money balances, real output, interest rate, and real effective exchange rate, using a modern version of the linear time-series macroeconometric model, that had previously cast doubt on money demand stability. Evidence of stable demand for money is found. Broad money, in general, captures a more stable demand for money than narrow money. The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart. Central banks can achieve their long-run “price stability” goal more effectively by using broad Divisia money growth as a key information variable that acts as a long-term check on short-term interest rate decisions.

Predicting Inflation—A Holistic Approach

The quantity equation is a well-established, theoretic, long-run concept that has been criticized for a variety of reasons, i.e., that no precise statements about causality or dynamics between money growth and inflation can be inferred from its components. These shortcomings can be tackled by estimating inflation based upon a holistic approach and the performance of a ceteris paribus analysis for various levels of quantity and velocity of money, as well as GDP. By testing the validity of the quantity equation, it is possible to evaluate possible effects of elevated budget deficits, unprecedented expansions of the monetary base caused by global lockdowns, and a crash in global productivity, on inflation. The main findings of this paper suggest that the level of productivity is the main driver of inflation. The quantity and velocity of money only play a subordinate role in the determination of the inflation level. If inflation is holistically seen as a function of the quantity and velocity of money, as well as general economic productivity, the level of inflation can be very well explained by comparing the supply side with general economic productivity.

The Effect of Money Creation in Increasing Demand and Generating the Economy

The purpose of this study is to study the effect of the creation of money in increasing demand and generating economy. Qualitative methods by collecting previous literature review are used to find out the relation between money creations and give effect towards economy. This study provides empirical evidence that money creation can be increase the demand and stimulate or generate the economy. This article explores about money creation that will give effect towards economy. The articles begins by outlining about money creation, highlight the current issues, money creation from banking perspective and money creation from economic perspective. The article then discusses the limits to the banking system’s ability to create money and the important role for central bank policies in ensuring that credit and money growth are consistent with monetary and financial stability in the economy. The final section discusses the effect of money creations towards economic performance. And finally, the article ends with conclusion parts.

Central bank digital currency: A review and some macro-financial implications

Central Bank Digital Currencies (CBDC) have attracted considerable interest and its deployment on a global scale is imminent. However, CBDC face several challenges. They include: legal, technological, and political considerations. We summarize those challenges and add a few more that have not received much attention in the literature. We then focus on two forms of CBDC: a narrow version that only replaces notes and coins and a broader form with a deposit feature. The narrow CBDC is the most likely one to be first introduced. Next, relying on evidence of past episodes of financial innovation, and using cross-country data, we explore the hypothetical impact of CBDC on inflation and financial stability, based on the historical behaviour of the velocity of circulation and incorporating a CBDC’s impact using McCallum’s policy rule which sets the stance of monetary policy based on money growth. Our simulations suggest that CBDC need not produce higher inflation, but financial stability remains at risk. We provide some policy implications.

A reconsideration of money growth rules

A New Keynesian model, estimated using Bayesian methods over a sample period that includes the 2009-15 episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve’s historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-9 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as simple but useful guides for monetary policy and eliminate concerns about monetary policy effectiveness when the zero lower bound constraint is binding.

Unexpected money growth, nonfinancial firms as large shareholders and investment-cash flow relationship: Evidence from Vietnam

This paper uses a sample of listed firms to raise questions as to how unexpected money growth affects firm-level investment in Vietnam, resembling tightening monetary policy impact. We find that most results that hold true in other countries also apply to Vietnamese firms during the years of our study. In particular, we find that higher cash flows are associated with higher investment when the assumption of tightening monetary policy is conducted, which is stronger in firms with external financial constraints. We also examine the impact of non-financial firm ownership and find that its presence reduces the investment impact of tightening monetary policy for affected firms. These results imply that the impacts of changes of the monetary stance on corporate investment seem to differ in a way that depends on cash flow and firm ownership characteristics.

Normalising money growth is reducing inflation risks

▪ Global money supply growth is starting to normalise, lessening the threat of high inflation. Upside risks to money growth remain, but timely action to rein in QE and modest rate hikes should be enough to keep inflation under control, in our view, and prevent a shift to a higher inflation ‘regime’. ▪ Money growth has slowed from a peak of 25% y/y to around 8% y/y in advanced economies, but the rate is still higher than the average of the past decade. In emerging economies (EM), money growth has already returned to normal levels. ▪ Our estimates of ‘excess’ money growth show it to be higher than is consistent with inflation targets in most advanced economies, especially the US. In EM, money growth looks excessive in Turkey and Nigeria but seems consistent with below‐target inflation in Russia, China, India, and South Africa. ▪ The main contributor to fast money growth in the advanced economies remains quantitative easing (QE) by central banks. Our forecasts suggest QE will remain a major contributor in the next few quarters before tailing off by late 2022. ▪ As QE fades, private credit will be the key driver of monetary growth. Our global indicator shows banks loosening credit standards at the fastest pace in a decade. Credit standards are still tightening in EM, but there's no sign yet of a post‐Evergrande financing crunch in China. ▪ Central bank surveys show signs of a revival in credit demand, although this recovery is patchy across economies and credit segments. Actual credit flows to the private sector are also picking up. But recent strength is concentrated in areas away from corporate lending, where loan growth remains negative or subdued in the US and Europe.

Attributes of Farm Income Operating on Conservation Agriculture: TheMultivariate and ANN Analytics

Conservation agriculture (CA) is the combination of environmental management, modernand scientific agriculture, which employs farmers’ ability to utilize, innovate, and adapt tochanging situations, as well as their holistic acceptance of knowledge along with ensuringsustainability. Farm-level adoption of CA is related to reduced labour and agricultural inputs,more consistent yields, and increased soil nutrient exchange capacity. A good quality landyields good results to everyone, confers good health on the entire family, and causes growthof money, cattle, and grain. The present study depicts hard evidences by identifying markervariables impacting income augmentation through conservation agriculture. A score of 50farmers has been selected from two blocks of Cooch Behar district of West Bengal, bynon-probability snowballing sampling techniques with a total of eighteen independentvariables along with income from major crop is used as the dependent variable through astructured interview schedule. A basket of multivariate analytical techniques has been appliedalong with Artificial Neural Network (ANN) as well. The results depict that a blend ofdiversified farming and farming experiences in CA contributed immensely to scale up incomefrom conservation agriculture approaches.

What Would Milton Friedman Say About the Recent Surge in Money Growth?

What Would Milton Friedman Say About the Recent Surge in Money Growth?