Higher Money Supply Research Articles

Econometric Insights into South Asia's Monetary, Output, and Price Dynamics: A Simultaneous Equation Modeling Approach

This study focuses on investigating the simultaneous relationship among money supply, inflation, and output of emerging South Asian countries. Data from seven countries in the South Asian region, spanning from 2000 to 2022, is collected for the analysis. Three variables are considered endogenous: Money Supply, Output, and Inflation. Following the fulfillment of assumptions, we employed the Panel Two-Stage Least Squares (Panel 2SLS) method to examine the relationship between money, output, and prices. The results indicated a significant bidirectional relationship between output and money supply, meaning that a higher money supply is associated with increased output and vice versa. Additionally, a unidirectional empirical relationship is observed between inflation and money supply. As the money supply does impact the output, so neutrality of money does not hold. The study recommends South Asian countries establish a policy framework that cautiously adjusts the money supply, balancing the need to prevent excessive inflation or deflation to maintain sufficient liquidity to support optimal economic output.

Interdependence between Monetary Policy and Stock Liquidity: A Panel VAR Approach

This article examines the relationship between monetary policy and individual stock liquidity in an order-driven emerging stock market like India. This study considers stocks listed in National Stock Exchange of India (NSE) and continuously traded from April 2002 to March 2015. Considering the multiple dimensions of liquidity, this study uses five different liquidity proxies to capture the various facets of liquidity such as trading activity, price impact and transaction cost. An array of macroeconomic and firm-specific control variables are used while analysing the liquidity and monetary policy relationship. Econometric methods like panel vector autoregressive (VAR)–Granger causality test, impulse response functions and variance decomposition analysis have been employed to carry out this analysis. The empirical findings suggest that monetary policy significantly Granger-causes stock liquidity, and the expansionary monetary policy characterised by low interest rate and higher money supply is positively associated with individual stock liquidity in India. The impact of monetary policy on liquidity of individual stocks is more prominent during financial crisis. The findings of the present study have certain theoretical as well as practical implications. The market participants in equity market can improve the forecasting of liquidity of their investment portfolio by employing monetary policy along with individual asset’s characteristics. Regulators and policymakers may consider the cross-sectional relationship between stock liquidity and monetary policy as an important source of information for policy formulation and implementation. JEL Classification: E44, E51, G12

Impact of Bank Capital on Non-Performing Loans: New Evidence of Concave Capital from Dynamic Panel-Data and Time Series Analysis in Malaysia

Amid the steep expansion in Malaysia household debt, we investigate the role of bank capital in disciplining non-performing loans (NPLs) after controlling for the macroeconomic environment. Utilizing generalized method of moments (GMM) on a dynamic panel-data of 19 commercial banks and stress testing of NPLs using vector autoregression (VAR) on aggregated-monthly time series of the banking system, we provide new evidence that the capital (in the past and in the future) is a concave function of NPLs implying that increasing the capital will initially increase the NPLs until NPLs reach a maximum threshold (under the moral hazard effect), after which more capital buildups will succeed in decreasing NPLs (under the disciplinary or regulatory effect). We also find that higher levels in GDP growth and lending interest rate and are associated with more NPLs, while higher inflation is associated with less NPLs. Monetary expansion, i.e. higher money supply growth raises NPLs in banks, while competition between banks and higher liquidity of the stock market are NPLs reducing.

Does money supply growth contain predictive power for stock returns? Evidence and explanation

We examine the nature of predictive power of money supply growth for stock returns. An understanding of which will be useful for market practitioners and policy makers given the current lack of consensus. In addition, knowledge of this relation can aid our understanding of the risk and cash flow channels of stock price movement. Using monthly data and considering a range of alternative predictor variables, predictive and forecast time horizons, empirical methodologies and measures of stock returns, we find that money supply growth has a negative predictive relation with stock returns. Rolling window forecasts provide confirmatory out-of-sample evidence for the significance of money supply growth as a predictor variable. The use of both returns and dividend growth predictive regressions, as well as a VAR analysis and predictive regressions for size and book-to-market portfolios suggest that relation operates through a risk channel. Higher money supply leads to improving economic conditions and lower (required) returns.

ANALYSIS OF MACROECONOMIC DETERMINANTS OFEXCHANGE RATE VOLATILITYININDIA

Exchange rate is known as the one of the crucial element for the development of the economy, it is seen that volatility hassignificant influence on the international trade. In this paper analyzed that impact of inflation rate and money supply onthe volatility of exchange rate of India. We collected the monthly data to estimate the short and long run relationshipbetween these variables. For this purpose, we have applied theJohansen Cointegration, VECM, GCT and IRF for analysisthe response of different shocks on the variables. This paper is showing that high money supply and interest rate increasethe inflation rate, which leads to increase the volatility in exchange rate on India.

Does Money Supply Growth Contain Predictive Power for Stock Returns? Evidence and Explanation

We examine the nature of predictive power of money supply growth for stock returns. An understanding of which would be useful for market practitioners and policy makers given the current lack of consensus. In addition, knowledge of this relationship can aid our understanding of the risk and cash flow channels of stock price movement. Using monthly data and considering a range of alternative predictor variables, predictive and forecast time horizons, empirical methodologies and measures of stock returns, we find that money supply growth has a negative predictive relation with stock returns. Rolling window forecasts provide confirmatory out-of-sample evidence for the significance of money supply growth as a predictor variable. The use of both returns and dividend growth predictive regressions, as well as a VAR analysis and predictive regressions for size and book-to-market portfolios suggest that relationship operates through a risk channel. Higher money supply leads to improving economic conditions and lower (required) returns.

An Econometric Analysis of Deficit Budget, Money Supply and Inflation in Nepal

High money supply (M2) and high budget deficits (BD) both are equally responsible for higher rate of inflation. Moreover, inflationary pressure gets more momentum when money supply and budget deficits both increase together. The empirical evidence of Nepal also supports this hypothesis. Present paper re-examines this issue in the context of Nepal by using econometric analysis. The empirical results reveal that long run inflation is not only related with higher money supply but also to budget deficit. On the one hand, there is unidirectional causal relationship between money supply with inflation and similarly budget deficit with inflation. On the other, the supply of money has no causal connection with budget deficit. Hence the finding implies that both monetary and fiscal policies are important to control inflation in Nepal.

Early warning systems for currency crises: The Turkish case

Different severe financial crises episodes occurred in the Turkish economy in the last two decades. These crises led to severe economic and social consequences for Turkey in terms of increasing interest rates, large reserves losses, considerable currency depreciations, high output losses and high unemployment rates. This paper aims to illustrate the essential determinants of these crises by developing a multivariate logit model which estimates the predictive ability of sixteen economic and financial indicators in a sample that covers the period from January 1990 to December 2008. The empirical findings show that the Turkish crises are mainly due to excessive fiscal deficits, high money supply growths, sharp rises in short-term external debt, growing riskiness of the banking system (in particular currency and liquidity mismatches), and external adverse shocks.

Sources Of Nominal Fluctuations of Exchange Rate in Turkey for the period (1980-2002)

This research discusses important subject(Sources of nominal fluctuations of exchange rate in turkey) by the beginning of the eighties of the last century , the research aimed to study and analysis these sources in Turkey for the period (1980-2002) , and explain the causes of this fluctuations in exchange rate and appointing its nature by depending on theoretical analysis and the empirical analysis. The research depended on hypothesis which was: the money shock (the growth of high money supply) and the external shock which carry the money style (increasing in capital flows),were the main responsible about the wide- fluctuations in the exchange rate of Turkish Lira. The two stage least square method (2SLS) had used for estimating the model which had used in this research , and the research arrived to some results, the most important result was: the money shock and the external shock (which carry money style) were the main sources of the fluctuations in Turkish Lira exchange rate , and confirmed the hypothesis of research.

Analyzing Determinants of Inflation When there Are Data Limitation:The Case of Sierra Leone

This paper examines the determinants of inflation in Sierra Leone using a structural vector autoregression (VAR) approach to help forecast inflation for operational purposes. Despite data limitations, the paper accurately models inflation in Sierra Leone. As economic theory predicts, domestic inflation is found to increase with higher oil prices, higher money supply, and nominal exchange rate depreciation. The paper then employs a historical decomposition approach to pinpoint the sources of a marked decline in inflation in 2006 and assesses its forecasting properties. Overall, the model serves as a useful addition to the toolkit for analyzing and forecasting inflation in countries with limited data availability.

Analyzing Determinants of Inflation When There are Data Limitation: The Case of Sierra Leone

This paper examines the determinants of inflation in Sierra Leone using a structural vector autoregression (VAR) approach to help forecast inflation for operational purposes. Despite data limitations, the paper accurately models inflation in Sierra Leone. As economic theory predicts, domestic inflation is found to increase with higher oil prices, higher money supply, and nominal exchange rate depreciation. The paper then employs a historical decomposition approach to pinpoint the sources of a marked decline in inflation in 2006 and assesses its forecasting properties. Overall, the model serves as a useful addition to the toolkit for analyzing and forecasting inflation in countries with limited data availability.

Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria

In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. We compute a traditional inflation bias equilibrium, in which price-setters are optimistic, rationally expecting small adjustments by other firms. But there is another steady-state equilibrium in which price setters are pessimistic and inflation is much higher. Further, we find that there are multiple equilibria at a point in time, not just in steady states. In a stochastic setting with equilibrium selection each period determined by an i.i.d. sunspot, there is greater inflation bias on average than if price-setters were always optimistic. The sunspot realization also has real effects: periods of higher than average inflation are accompanied by low output. Thus, increased real volatility may be an additional cost of discretion in monetary policy.

Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria

In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy responds.

Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria

In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. We compute a traditional inflation bias equilibrium, in which price-setters are optimistic, rationally expecting small adjustments by other firms. But there is another steady-state equilibrium in which price setters are pessimistic and inflation is much higher. Further, we find that there are multiple equilibria at a point in time, not just in steady states. In a stochastic setting with equilibrium selection each period determined by an i.i.d. sunspot, there is greater inflation bias on average than if price-setters were always optimistic. The sunspot realization also has real effects: periods of higher than average inflation are accompanied by low output. Thus, increased real volatility may be an additional cost of discretion in monetary policy.

Purchasing power parity and cointegration: The Greek evidence from the 1920s

This paper presents empirical evidence which supports the purchasing power parity (PPP) hypothesis for three bilateral exchange rates involving the Greek drachma during the 1920s, using the technique of cointegration of economic time series. The results are obtained for a period of high money supply growth and a high and variable rate of inflation which gave rise to large differentials in price movements between Greece and the other countries. The speed at which long-run PPP was reached following a shock was 50 per cent per month confirming the results of other studies of PPP over the 1920s, and explaining the supportive evidence for long-run PPP even though data over a short period were used. (JEL F31)