Monetarist View Research Articles

The Asymmetric Effects of Global Energy and Food Prices, Exchange Rate Dynamics, and Monetary Policy Conduct on Inflation in Indonesia

This research analyzes the asymmetric effects of global energy and food prices and monetary variables, including the exchange rate and money supply, on the consumer price index (CPI). The model is intended to differentiate the influence of increases and decreases in global energy and food prices, exchange rates, and money supply which cause inflation/deflation from changes in the CPI. The analysis uses the Nonlinear Autoregressive Distributed Lag (NARDL) and Quantile Regression models on data from January 2001 to February 2023. The study results show that the decline in global energy prices significantly reduces the CPI in the long run. Energy subsidies allow increases in international energy prices not to increase the CPI significantly. Meanwhile, the increase in global food prices causes inflation in the short run. The exchange rate has the most significant effect on the CPI. Depreciation of the rupiah significantly increases the CPI, which means it causes inflation, while appreciation of the rupiah does not have a significant effect. Finally, increases and decreases in the money supply have a considerable positive effect on the CPI, which confirms the logic of the monetarist view that inflation is a monetary phenomenon. Efforts to reduce dependence on imports of food and energy commodities are the key to reducing risks when importing energy and food due to rupiah depreciation. Efforts to consistently stabilize the exchange rate can support controlling and stabilizing import prices. Energy and food subsidy policies are vital in controlling inflation due to increased world energy and food prices.

ÜLKELERİN GELİŞMİŞLİK FARKLILIKLARI ÖZGÜRLÜK YAPISI İLE AÇIKLANABİLİR Mİ?

This study aims to test the relationship between the liberal structure of countries and the development of countries. GDP per capita and price stability were used as performance measures for this. For this purpose, two separate models were constructed for developed and developing countries. Model I analyses the effect of economic freedoms on GDP per capita and Model II analyses the impact of economic releases on the consumer price index. According to the analysis using panel data analysis for developed and developing country groups, the findings reveal that a libertarian structure positively affects economic growth and is a discriminator in the emergence of development differences in countries. In contrast, a libertarian design does not have a significant relationship with price stability. These findings provide evidence in support of the Monetarist view that inflation is always a monetary phenomenon. According to the results of this study, it is recommended that especially developing countries should implement prudent policies towards price stability in monetary and fiscal policy.

TÜRK KAMU MALİYESİNDE PARASAL VE MALİ BASKINLIK

The interactive roles of monetary and fiscal policies are represented by two competing theories in the literature. The advocates of the first theory, the monetarist view, argue that the fiscal authorities tune the primary balance in an attempt to preserve the fiscal solvency for each price level. On the contrary, the proponents of the new approach assert that the fiscal authorities are able to set primary surplus without making a binding commitment to restore solvency. In this study, the purpose is to figure out which approach is valid for Turkish public finances. To accomplish this objective, we run a model based on Bohn (1998) using the Auto Regressive Distributed Lag (ARDL) method so as to determine the type of regime prevalent in the Turkish economy. Besides, we run a Toda-Yamamoto type causality analysis to detect the direction of causality among public debt and primary balances. The results from both analyses reveal that the Turkish public finances are characterised by monetary dominant regimes which indicate that the fiscal solvency is restored by primary balance alterations by a set of active fiscal policy actions.

Whether Fiscal Stance or Monetary Policy is Effective for Economic Growth in Case of South Asian Countries?

Monetary policy and fiscal policy are sister strategies that can be used alone and in combination to direct the economic goals. In the literature relative efficacy of fiscal and monetary policy has been studied extensively. Friedman and Meiselman (1963), Ansari (1996), Reynolds (2000, 2001), Chari, et al. (1991, 1998), Schmitt and Uribe (2001a), Shapiro and Watson (1988), Blanchard and Perroti (1996), Christiano, et al. (1996), Chari and Kehoe (1998), Kim (1997), Chowdhury (1986, 1988), Chowdhury, et al. (1986), Weeks (1999), Feldstein (2002) and Cardia (1991) have examined the impact of fiscal and monetary policies on various economic aggregates. However, the bulk of theoretical and empirical research has not reached on conclusion concerning the relative power of fiscal and monetary policy to effect economic growth. Some researchers find support for the monetarist view, which suggests that monetary policy generally has a greater impact on economic growth and dominates fiscal policy in terms of its impact on investment and growth. [Friedman and Meiselman (1963); Ajaye (1974); Elliot (1975); Batten and Hafer (1983)], while other argued that fiscal stimulates are crucial for economic growth. [Chowdhury (1986); Olaloye and Ikhide (1995)], On the other hand, according to Cardia (1991) macroeconomic activities are largely explained by some other variables. The experiment of 1970s clearly demonstrates that a policy mix produced only stagflation. Some economist took keen interest in money by combining Keynesian neoclassical mixture which is called the “funnel” theory by James Tobin. The argument was that tax rate and money growth simultaneously leads to stagflation thus the Government could choose either fiscal or monetary policy stimulus which will enhance growth. [Reynolds (2001)].

Monetization of the Economies as a Priority of the New Monetary Policy in the Face of Economic Sanctions

The purpose of this paper is to conduct a comparative analysis of monetization as a priority of the new monetary growth of the economies using the example of the Russian economy, identifying new trends in global practices of monetary factor management, as well as the search for ways to stimulate economic growth using the best international experience. Our paper tackles the novel research question of whether changing the priorities of monetary policy from targeting (and curbing) inflation to stimulating economic growth might yield more favorable economic results and what best world practices should be appropriately introduced in Russia to improve the effectiveness of monetary policy. The key results of the paper are focused on a comparative analysis of the economies’ development under the influence of monetary factors in comparison with the most progressive economies, the study of the best practices for increasing the monetization of national economies, and the identification of recommendations for determining the most optimal way to increase economic growth through the monetization of the economy. Monetarist views on the decisive role of fiat money in the development of the real sector of the economy, capital markets, payment and settlement systems, the standard of living of the population, and other important aspects of macro- and microeconomics have become the mainstream of government regulation. It seemed that by finding the right indicators of the relationship between interest rates, GDP, and inflation, all problems of economic growth could be solved. By increasing the amount of money faster than the achieved economic growth, it was believed that it was possible to stimulate GDP growth through monetary investments and credit, i.e., more money was issued than the value produced represented by the goods and services. Accordingly, new money that had no value had to create new value. We argue that monetization can be seen as the main factor in providing such incentives. Our results can be useful for central bankers, policymakers, and stakeholders in the banking and financial sector. The conclusions and recommendations of the authors are based on studies conducted using such research methods as content analysis, logical analysis, and statistical analysis.

Денежное предложение в истории макроэкономической мысли: 50 оттенков эндогенности

The paper considers the evolution of the money supply concept in economics through the lens of contemporary discussion on the degree of its endogeneity. It is stated that the model of exogenous money supply formation, widespread in the literature and actively criticized in recent decades, is an artifact of macroeconomic thought. Its dominance lasted a very short time period, and various forms of endogeneity were attributed to money supply much more often in the course of monetary theory development. Authors cover the debates between the currency and banking school in the XIX century, the birth of the theory of money multiplier, Keynes’ position, the monetarist view of money supply and its criticism by Post- Keynesians. Particular attention is paid to the turn in views within the mainstream, from the Real Business Cycles doctrine to state-of-the-art models of the New Synthesis. It is emphasized that the complete exogeneity of money supply is a distinctive feature only of the monetarist approach, which has relied on the specifi c assumption of the stability of money demand function. The paper shows that, despite the visible convergence between the New Keynesian and Post- Keynesian positions, based on the modeling of interest rate targeting rather than money supply targeting by the central bank, fundamental differences still remain between two camps regarding the endogeneity mechanism.

Prices, Money Supply and Output Nexus in Pakistan – A Macro Econometric Model

This study is an endeavor to examine joint determination of prices, money supply and output in Pakistan during 1975-2019 by using macro-economic model and annual time series data. Three Stage Least Square (3SLS) method is utilized to estimate simultaneous model of prices, money supply and output nexus. Our results strongly support significant positive association between prices and money supply thus supports monetarist view that growth in money supply causes inflation and rising behavior of prices is detrimental to real output. The accelerated inflation has obstructed real output and reduced output levels has further caused jump in price levels during the investigated period. The empirical results also supports significant bi-directional relationship between prices and money supply. Prudent monetary policy is need of hour to stabilize prices in order to minimize its adverse impacts on real output.

Impact of socioeconomic development on inflation in South Asia: evidence from panel cointegration analysis

Purpose This study aims to examine the influence of socioeconomic development on inflation in South Asia using the foreign exchange rate and money supply as control variables. Design/methodology/approach The study uses annual panel data for five South Asian economies, namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka over the period 1990–2018, applies cointegrating regression techniques, namely, the panel dynamic ordinary least square (OLS) and fully modified OLS estimators to examine the long-run relations and conducts the Toda-Yamamoto Granger causality test to detect the direction of causality among variables. Findings The cointegrating regression estimations have documented that the socioeconomic development proxied by the human development index (HDI) has no significant impact on inflation. Although economic development represented by gross domestic product (GDP) growth causes inflation, socioeconomic development represented by HDI has no impact on inflation and has demonstrated as a better macroeconomic indicator, and thus creates no inflationary pressure in the economy. The foreign exchange rate has a positive impact on inflation. The broad money supply has the usual positive effect on domestic inflation that endorses the monetarist view about prices. The Toda-Yamamoto Granger causality test has confirmed several unidirectional causalities: inflation causes HDI, money supply causes both inflation and HDI and the foreign exchange rate causes HDI. Practical implications The study has practical implications for policymakers in South Asia, to improve HDI, particularly GDP per capita, education and health-care facilities to realize continuous socioeconomic development, which will take care of inflation. Moreover, these counties may follow a conservative monetary policy to control inflationary pressure in their economies. Originality/value The study is original and claims to be the first to examine the impact of socioeconomic development on inflation. The findings have socioeconomic values regarding controlling inflation in South Asia.

A Note on the Competing Causes of High Inflation in Bulgaria during the 1990s: Money Supply or Exchange Rate?

ABSTRACT This note aims at analyzing Bulgaria’s high inflation regime during the 1990s. Two competing causes of high inflation are explored: changes in the rate of growth of the money supply in the economy and changes in the foreign exchange rate. Both correspond to traditional theoretical explanations: the monetarist view and the balance of payments approach. Evidence suggests that a variation in the exchange rate is significant in explaining the high inflation regime in Bulgaria whereas monetary growth appears to be insignificant. Consequently, the paper underlines the importance of stabilizing the exchange rate in the short run in order to avoid high inflation.

Mind the gap!—A monetarist view of the open-economy Phillips curve

In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past decades. We introduce money and credit into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation is based solely on domestic and foreign slack, and (ii) global liquidity (global money as well as global credit) is tied to global slack in equilibrium. Then, motivated by the theory, we evaluate empirically the performance of open-economy Phillips-curve-based forecasts constructed using global liquidity measures (such as G7 credit growth and G7 money supply growth) instead of global slack as predictive regressors. Using 50 years of quarterly U.S. data, we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly-measured indicators of global slack that global liquidity proxies for.

Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve

In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past decades. We introduce money and credit into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation is based solely on domestic and foreign slack, and (ii) global liquidity (global money as well as global credit) is tied to global slack in equilibrium. Then, motivated by the theory, we evaluate empirically the performance of open-economy Phillips-curve-based forecasts constructed using global liquidity measures (such as G7 credit growth and G7 money supply growth) instead of global slack as predictive regressors. Using 50 years of quarterly U.S. data, we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly-measured indicators of global slack that global liquidity proxies for.

Relationship between Monetary Policy, Domestic Prices, Financial Development and Economic Growth: Evidence from Pakistan

The objective of the study is to examine the relationship between monetary policy, domestic prices, financial development and economic growth in a context of Pakistan by using a consistent time series data from 1980 to 2016. The results show that real interest rate increases exchange rate that negatively influenced on country’s economic growth, which confirmed that contractionary monetary policy is ineffective to stabilize country’s economic growth. The trade linearization policies hurt Pakistan’s economic growth, which invalidate the positive effect of globalization in developing countries. The inbound FDI has a positive impact on economic growth, whereas exchange rate and changes in price level both have a negative impact on inbound FDI in a country. The domestic saving rate substantially increases inbound FDI in a country. The positive impact of money supply on inflation confirmed the monetarist view of inflation, i.e., money supply leads to inflation. Thus, the overall conclusion confirmed the sound viability of expansionary monetary policy in a given country for sustained growth.

Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve

In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past decades. We introduce money and credit into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation is based solely on domestic and foreign slack, and (ii) global liquidity (global money as well as global credit) is tied to global slack in equilibrium. Then, motivated by the theory, we evaluate empirically the performance of open-economy Phillips-curve-based forecasts constructed using global liquidity measures (such as G7 credit growth and G7 money supply growth) instead of global slack as predictive regressors. Using 50 years of quarterly U.S. data, we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly-measured indicators of global slack that global liquidity proxies for.

ANALYSIS OF THE RELATIONSHIP BETWEEN INFLATION, BUDGET DEFICIT AND MONEY SUPPLY IN TURKEY BY ARDL APPROACH 1980-2017

Inflation is considered as a monetary phenomenon and its increase is linked with money supply according to the Monetarist view. In other words, the increase in budget deficits leads to an increase in money supply and as a result, inflation rates rise. Inflation is based on fiscal policies rather than monetary policies according to Price Level Fiscal Theory. Accordingly, increasing budget deficits leads to increases in loans, thus causes interest rates to rise and consequently inflation rises as money supply increases. In this study, the relationship between inflation, budget deficit and money supply in Turkey is analyzed using the ARDL bounds testing approach for the 1980-2017 period. According to the empirical results, there was a positive and significant relationship between inflation and budget deficit both in the long and short term.Keywords: Inflation, Deficit, Money Supply, Turkey, ARDLJel Codes: E31, E51, E52

Modeling Money and Credit: The New Monetarist View

In this paper, we survey recent theoretical work on money and credit following the New Monetarist approach. We argue that a coherent macroeconomic model should show that both these institutions are essential, in the sense that they help achieve allocations that could not be attained without them. As recent literature shows, however, this is difficult to establish and requires being very explicit about the frictions that money and credit help overcome. The paper highlights the importance of microfoundations and provides a word of caution against using reduced form models in macroeconomics.

The Relationship between Money Supply, Price Level and Economic Growth In Pakistan: Keynesian versus Monetarist View

AbstractThe objective of the study is to examine the relationship between money supply, price level and economic growth in the context of Pakistan by using Autoregressive Distributed Lag (ARDL) model, covered a period of 1980 to 2016. The results confirm the long-run relationship between the variables while using broad money supply as a response variable. However, in the price and income modeling, the variables do not support the cointegration relationship between the variables. The causality results confirmed the unidirectional relationship running from income to money supply, which implies that income do causes money supply in the short run, whereas money supply leads to inflation to support Monetarist view of inflation in a country. The results conclude that economic growth is imperative to stabilize money supply and price level through sound economic policies in a country.

The intellectual origins of the monetarist counter-revolution reconsidered: how Clark Warburton influenced Milton Friedman’s monetary thinking

Clark Warburton’s contributions during the 1940s and early 1950s are widely considered to have anticipated the key tenets of the monetarist counterrevolution of the 1960s and the 1970s. Hitherto, however, Warburton has not been considered as someone whose views may have directly shaped the development of Milton Friedman’s monetarist views. While it is not possible to establish a direct causal line between Warburton’s views and Friedman’s monetarism, including its emphasis on the efficacy and primacy of open-market operations, the preferability of a monetary-growth rule to attain price-level stability, the need of a clear separation of a government’s fiscal operations from the monetary-policy operations of the central bank, and the destructive role played by the Fed in the Great Depression, this paper shows that the connection between Warburton’s contributions and Friedman’s monetarism is considerably tighter than previously thought.

Monetary analysis and the global financial cycle: An Asian central bank perspective

Emerging Asia has seen a transformation of its monetary policy environment over the past two decades. By far, the most relevant change has been the maturing of its financial systems and the growing relevance of the global financial cycle: financial inclusion has spread, financial markets have deepened and financial globalisation has linked domestic markets closer to international markets. One consequence of the maturing of the financial systems has been the weakening of the traditional case for the monetarist view of the roles of monetary aggregates in the conduct of monetary policy. In addition, the maturing of the financial systems has elevated concerns of financial stability, as both a source of shocks and a responsibility of central banks. These developments have been further complicated by monetary policy spillovers from the advanced economies. All this points to the need to consider alternatives to conventional inflation targeting frameworks. This paper lays out a policy framework based on a multi-pillar monetary policy approach as a potentially attractive alternative for EM Asia. The three pillars are based on economic, financial and exchange rate stability, respectively. This framework not only offers an alternative conceptual framework but also implies institutional reforms to ensure central banks take a longer term perspective when setting policy.

Money Supply, Class Power, and Inflation

Recent sociological work shows that pro-market neoliberal policies across advanced capitalist countries are due to distributional struggle between classes in the 1970s and 1980s. The orthodox monetarist view, alternatively, sees neoliberal reform as a nonpolitical attempt to end the stagflation crisis of the 1970s. From this perspective, monetary and fiscal expansions brought high inflation, and central bank discipline and government austerity is the solution; but the recent trend of low inflation despite accelerating money growth and government spending contradicts this view. Analyses of time-series cross-section data for 23 OECD countries from 1960 to 2009 support the thesis that the rise and fall of inflation is more about distribution of power between labor and capital than about monetary and fiscal discipline. Inflation in the 1970s originated from a strong working class and hurt capital more than it did workers, while neoliberal repression of workers’ power has kept inflation low from the 1980s onward. Disempowerment of labor created rising inequality and economic imbalances that fueled a financial boom underlying the global financial crisis of 2008. Re-empowering labor is a remedy to such imbalances and the subsequent deflationary pressure.

STATE INTERVENTION AND MACROECONOMIC MANAGEMENT

The monetarists are opponents of government intervention and supporters of free market processes. Keynesians are, conversely, supporters and advocates of government intervention and opponents of uncontrolled operation of the market mechanism. As opponents of government intervention, the monetarists do not agree that it should take countercyclical fiscal policy which can cause greater increase in expenditures of the public sector during the recession, but spending cuts in the period of expansion and that, consequently, the public expenditures continue to increase. However, Tobin, indicating a negative attitude, claims that inflation cannot be used as a reason to reduce the budget, if fiscal policy has little or no effect on income. Undesirability of countercyclical fiscal policy is a logical consequence of the monetarist views on the stability of the sector and better performance of the free market of government intervention in social reproduction. Rule on a constant rate of monetary expansion eliminates the need for conducting discretionary policy, as the Phillips curve, previously defined, does not allow an optimal combination of inflation and unemployment. Therefore, the use of money (and interest rates and bank loans), as the goal of monetary policy provides economic policy makers to focus on managing variability (i.e. concentrate to money supply), which is beyond the scope of operation of the market, on the one hand, and to let determining the interest rates of bank loans and the free market, on the other hand. Finally, monetarists are extremely concerned about the multiple connections between inflation and expansion of the public sector, for three reasons: first, inflation increases the share of the public sector (and exacts an increase in public expenditure), if a progressive tax system is functioning; second, combating inflation can only indirectly limit the expenditure of the public sector, as the government expenditures partly increase by inflationary financing; and third, financing the budget deficit with the primary issues typically involves inflationary effect, which, if it continues, initiates the process prices and wages control. The paper is based on theoretical analysis of the impact of state intervention in the sphere of stimulating economic recovery, growth and development.