Monetary Theory Research Articles

Technological lock-in developing countries: The role of external financing

Liabilities denominated in foreign currency have established a permanent role in emerging market firms’ balance sheet, which implies that changes in both global liquidity conditions and in the value of the currency may have a long- lasting effect for them. In order to consider the financial conditions that may encourage (discourage) structural change in a small, open economy, we adopt the framework put forward by the “Monetary theory of distribution” (MTD). More specifically, we follow the formulation adopted by Dvoskin and Feldman (2019), whereby the financial system is intended as a basic sector that promotes innovation (Schumpeter, 1911). In accordance to this, financial conditions are binding only for the innovative entrepreneurs, whose methods of production are not dominant and hence they need to borrow from banks to kick- start their production. Through this device, our model offers an explanation to the technological lock-in experienced by a small, open economy which takes international prices as given.

Measuring real money demand in Cambodia: an ARDL approach to cointegration

The findings obtained through the ARDL approach to cointegration indicate that real income, consumer price index, and interest rate are cointegrated with real money demand. In terms of the estimated results derived from the long-run model, it is observed that real income has a statistically significant positive impact on real money demand, while the general price level and interest rate have a negative impact. The short-run dynamic model, known as the error correction model, demonstrates that all explanatory variables collectively account for the growth rate of real money balances. In the short-run, the growth rate of real income exhibits a positive relationship with the demand for real money, whereas the inflation rate and changes in interest rate have a significant negative effect on the demand for real money balances. The estimated slope coefficient of the short-run dynamic model, which measures the speed of adjustment, is projected to be 60.67%. This outcome suggests that the real money balance model takes no more than two quarters to adjust towards long-run equilibrium in response to short-run dynamic shocks. Stability tests, such as the CUSUM and CUSUMSQ tests, indicate that the real money demand function in Cambodia remains stable in the long-term. The findings derived from this study provide empirical evidence in favor of the quantity theory of money.

Schumpeter and the post‐Keynesian monetary theory

AbstractThe name of Schumpeter is not among those of the precursors of post‐Keynesian monetary theory. This seems understandable when considering Schumpeter's ferocious criticism of The General Theory. However, in recent years various authors have highlighted significant points of contact between Schumpeter's monetary theory and that of Keynes and of post‐Keynesians. The objective of this work is not only to indicate the similarities between Schumpeter's monetary theory and that of the post‐Keynesians, but rather to show that Schumpeter's approach to money and credit allows making post‐Keynesian monetary theory more solid. In particular, we will show that Schumpeter's monetary theory enables to develop an explanation of the principle of effective demand sounder than that based on the simple presence of endogenous money and on the liquidity preference theory.

Does one size fit all in the Euro Area? Some counterfactual evidence

This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence supporting this claim for the periods of the Great Recession and the Sovereign Debt Crisis. The deterioration of the tradeoff becomes insignificant only after Draghi’s ‘whatever it takes’ announcement. Results show that the detrimental effect of the Euro is more severe for peripheral countries. We base our results on a novel empirical strategy that, consistent with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply and demand shocks.

Investigating the Economic Dynamics of Mobile Money in Post-Conflict Economies: Empirical Evidence from Somalia

This study investigates the economic dynamics of mobile money in Somalia, focusing on its transformative potential to impact economic activities in the short and long term. Adopting a quantitative research design, the study utilizes secondary data from 2010 to 2022. The autoregressive distributed lag (ARDL) approach is employed to assess the impact of mobile money on household consumption, real income, exports, and imports. Theoretical insights from the quantity theory of money further guide the examination of how mobile money influences economic activities. The findings demonstrate that mobile money has a significant positive effect on household consumption, real income, export growth, and import activity both in the short and long term. The study reveals that mobile money not only facilitates financial transactions but also enhances trade efficiency and promotes financial inclusion, thereby stimulating economic activities and growth. The study underscores the need for a supportive regulatory environment for mobile money services. It highlights that financial institutions and mobile money service providers should expand innovative services to include the unbanked population. By doing so, they can leverage mobile money to foster greater economic engagement and empowerment. Policymakers are encouraged to develop strategies that promote financial inclusion and economic development to harness the full potential of mobile money. This study enriches the existing literature by uniquely investigating the economic impacts of mobile money in Somalia, a post-conflict setting, thereby broadening the understanding of how financial technologies can catalyze economic activities and growth in similar contexts.

The lens of the quantity theory of money to disentangle the perceived relationship between money growth and inflation: a PSVAR approach

This paper contributes to the debate on the re-appraisal of monetization mechanism as a possible tool for dealing with macroeconomic imbalances due to close economic shocks (e.g. the Covid pandemic, the Russia-Ukraine conflict and the escalation in Israel-Hamas crisis). We analyze and empirically discuss the well-known Quantity Theory of Money (QTM), by applying the SVAR methodology to a heterogeneous panel including several Countries (Australia, China, India, Japan, United Kingdom and the United States) plus the block of Euro Zone (EZ) over the period 1992–2022. We investigate the dynamics and the impacts of the variables included in the theoretical model (inflation, GDP growth, money growth and the change in the velocity of money) through the analysis of the macro economic datasets retrieved from the OECD and Trading Economics databases. We find that money growth does not exert the decisive spillover effect on the path of inflation (i.e. common shock) throughout our sample. Moreover, our results indicate that the idiosyncratic component does not show a predominant and determining role of monetary growth in inflationary dynamics.

Expectations and the neutrality of interest rates

Our central banks set interest rates, and do not even pretend to control money supplies. How do interest rates affect inflation? We finally have a complete economic theory of inflation under interest rate targets and unconstrained liquidity. Its long-run properties mirror those of monetary theory: Inflation can be stable and determinate under interest rate targets, including a peg, analogous to a k-percent rule.Uncomfortably, stability means that higher interest rates eventually raise inflation, just as higher money growth eventually raises inflation. Sticky prices generate some short-run non-neutrality: Higher nominal interest rates can raise real rates and lower output. A model in which higher nominal interest rates temporarily lower inflation, without a change in fiscal policy, is a harder task. I exhibit one such model, but it paints a more limited picture than standard beliefs. Generically, without a change in fiscal policy, monetary policy can only move inflation from one time to another.The last decade has provided a near-ideal set of natural experiments to distinguish the principal theories of inflation. Inflation did not show spirals or indeterminacies at the long zero bound. The large monetary-fiscal expansion of the covid era produced a temporary spurt of inflation. The same money unleashed in quantitative easing had no such effect.

NEW APPROACH TO PROXIMITY ANALYSIS BETWEEN TWO HORIZONTAL MULTI-TABLES: DSCIA2 METHOD

In this paper, we propose a new method called Dual Simultaneous Co-Inertia Analysis Type 2 (DSCIA2), which is both a new approach to DSCIA in the context of two horizontal multi-tables and Dual of SCIA2 method. The aim is to study the variability of the proximity between pairs of tables with the same variables, by constructing the common axes of representation of the variables and the individuals simultaneously, i.e. constructing in one go an orthogonal matrix containing the solutions. An example of this method consisting being studied of the compared economic evolution of the countries of the Economic Monetary Community of Central Africa (EMCCA) and the West African Economic Monetary Union(WAEMU) is given.

The Quantity Theory of Money, Quantitative Easing and the Missing Inflation Phenomenon

Abstract Several explanations have been put forward for the observation that massive inflation has not appeared as a result of the explosive monetary growth generated by quantitative easing that was in 2008. Several plausible explanations have been put forward for this observation, but none of them can explain the huge gap between monetary inflation and price inflation. The alternative explanation presented in this paper is that monetary inflation is more reflected in stock prices than the CPI. It is demonstrated that by adjusting the CPI to reflect changes in stock prices, the gap between the trends of the money supply the CPI can be almost eliminated.

MONETARY POLICY DYNAMICS AND ECONOMIC PERFORMANCE IN BANGLADESH: AN ARIMA MODEL APPROACH

This study delves into the impact of monetary policy on the economic performance of Bangladesh, utilizing data derived from audited annual reports of the Bangladesh Bank covering the years 2014 to 2022. The central focus of the analysis revolves around Gross Domestic Product (GDP) as the dependent variable, with money supply growth, real interest rate, exchange rate, inflation rate, and repo rate considered as independent variables. Employing two regression models, namely Ordinary Least Squares (OLS) and Autoregressive Integrated Moving Average (ARIMA), the research aims to explore the relationships among these variables. In the OLS regression model, significant associations are identified between GDP and real interest rates, inflation rate, and the repo rate. However, no statistically significant relationships are observed between GDP and money supply growth or the exchange rate. On the contrary, the ARIMA regression model indicates statistical significance for all variables, except the exchange rate, concerning their impact on GDP. These findings suggest that monetary policy plays a substantial role in shaping the economic growth of Bangladesh, with real interest rates, inflation rates, and repo rates exerting particular influence. The lack of a significant relationship between the exchange rate and GDP in the ARIMA model implies that other factors, potentially external to the country, may have a more dominant influence on exchange rate dynamics during the study period. This research contributes to a deeper understanding of the complex interplay between monetary policy and economic performance in Bangladesh, offering valuable insights for policymakers and stakeholders.

European monetary economy: global challenges and development trends

The paper examines the key challenges and trends in the development of the European monetary economy, substantiates inflationary factors and fundamental factors of changes in the structure of the economy under the influence of geopolitical transformations and changes in supply chains, identifies financial and economic shocks from a sharp increase in the ECB key policy rate, and substantiates the impact of tight monetary policy on the decline in economic activity and structural deformations in the financial sector. The author proves that Russia's full-scale invasion of Ukraine has led to serious problems and disruptions in supply chains and bottlenecks in energy supplies in Europe. This, in turn, has led to rapidly rising inflation, significant changes in international trade, and forced monetary and fiscal policy to respond on an unprecedented scale. The immediate response of central banks was to raise interest rates in order to contain inflation. The rapid increase in interest rates has had a significant impact on financial stability. High interest rates, in particular, have led to a low ability to service the debts of heavily indebted corporations and have changed the structure of financial institutions' balance sheets. The change in the monetary policy regime has triggered new financial and economic challenges and large-scale adjustment processes in households, companies, and financial markets. It is substantiated that due to the imbalance in the portfolios of non-banking institutions, the sector still demonstrates high credit and liquidity risks. In the context of macroeconomic uncertainty and market volatility, they remain vulnerable to asset price corrections. Parts of the non-bank financial sector also have significant on- and off-balance sheet debt. Weaknesses in this sector pose additional risks to the financial system, including through its linkages to the banking sector. In such circumstances, the credibility of central banks is a key asset of the monetary economy, which is very important in times of high uncertainty. Monetary policies based on central bank credibility, such as inflation targeting, help to reduce inflation, and it is therefore important to demonstrate a commitment to ensuring that inflation returns to its medium-term target in a timely manner. In the euro area, the medium-term inflation target is 2%. In making interest rate decisions, the European Central Bank is guided by three considerations: first, the outlook for inflation in light of economic and financial developments; second, the dynamics of core inflation; and third, the impact of monetary policy on funding conditions and the real economy.

The Effect of the Exchange Rate on Price Stability in Iraq from 2004-2022

This Paper examines how the exchange rate influences price stability in Iraq using the Autoregressive Distributed Lag (ARDL) method. Monthly data covering the period from January 2004 to April 2022 are employed, with the Consumer Price Index (CPI) used as the dependent variable and Exchange Rate (EX), Oil Prices (OILR), Money Supply (M2), Policy Interest Rates (IR), and Government Spending (GOSP) as independent variables. The ARDL bound test results confirm a long-run relationship between the exchange rate and price stability in Iraq; the results indicate that a more robust exchange rate is associated with higher price stability, emphasizing potential benefits from currency strength. The positive link between government spending and price stability suggests the stabilizing impact of fiscal policies. In contrast, the negative association between interest rates and price stability corresponds to expectations of reduced economic activity. Findings on money supply support the quantity theory of money, and the negative relationship between oil revenue and price stability highlights challenges associated with economic reliance on oil. The Paper offers valuable insights for policymakers, emphasizing the importance of exchange rate stability, economic diversification, and precise adjustments in monetary and fiscal policies to ensure sustained price stability in Iraq. Paper type: Research paper.

SOLUTION OF NONLINEAR PARTIAL DIFFERENTIAL EQUATIONS BY A DEFORMATION BASED SAWI’S TRANSFORM

In this paper, we propose a new method called Dual Simultaneous Co-Inertia Analysis Type 2 (DSCIA2), which is both a new approach to DSCIA in the context of two horizontal multi-tables and Dual of SCIA2 method. The aim is to study the variability of the proximity between pairs of tables with the same variables, by constructing the common axes of representation of the variables and the individuals simultaneously, i.e. constructing in one go an orthogonal matrix containing the solutions. An example of this method consisting being studied of the compared economic evolution of the countries of the Economic Monetary Community of Central Africa (EMCCA) and the West African Economic Monetary Union(WAEMU) is given.

Modern Monetary Theory and Energy Conservation: An Institutionalist Approach to Fiscal Policy and Energy Conservation

Abstract: This paper will set out to develop a policy proposal that is couched in the Modern Monetary Theory (MMT) framework of fiscal policy analysis. MMT teaches us that a sovereign government that issues a free-floating currency is not bound by the tenets of what can be termed “sound finance.” Sound finance suggests that all government spending is preceded by the taxing or borrowing of the currency being spent. According to MMT, since the currency is issued by the sovereign nation during the process of spending, then this spending must take place before any taxing or borrowing is done. A federal deficit is not something to be eliminated but is the normal situation, with inflation being the only real measure of spending exceeding economic capacity. Sovereign governments are currency issuers, and the money has value if the government is willing to accept it in payment to itself. This creates policy space for spending programs that are socially and ecologically beneficial. Similarly on the tax side, there is policy space to structure the tax system in a politically determined way. The tax system is one way in which the citizens of a nation engage economically with the government. The tax obligation serves as a value anchor for the fiat currency. The tax system can be designed to incentivize behavior in line with a more ecologically sustainable future. This paper will suggest that by taxing living space in a progressive manner, multiple social and economic goals can be accomplished as the economy is transitioning toward a more environmentally sustainable future.

Reintroducing Time, Money and Constraints: Viability to Bridge the Economic and Monetary Theories

Why use a viabilistic approach to model economy? Because it is urgent to re-assess the modeling of the business cycle that integrates dynamic money creation and that has at its core the notion of constraints. The purpose of this paper is thus to propose an evolutionary economic model using a mathematical framework derived from set-valued analysis, differential inclusions and viability theory. As this approach is dynamical, the model will not use two concepts on which neo-classical economics are built i.e., (1) the existence of static repeated equilibria, (2) the optimization by an economic agent of a utility function. Furthermore, we will not use any self-organization process or “invisible hand”, as in our viabilist framework the economic viability will be maintained by explicit choices of the economic agents and of the lender of last resort over the budgetary and monetary rules to apply. Indeed, even simple constraints on the second-derivative of the means of payments already induce four-phased business cycles. Coupling these constraints over the creation of means of payment with economic evolutions of prices and commodities through a budgetary constraint allows for a single formalism, tackling jointly the question of the viability of economic and monetary evolutions.

Functional Finance and the Sustainability of Universal Basic Income

Abstract “Functional finance” is an economic theory within the Post Keynesian school of thought. Especially in the form of Modern Monetary Theory (MMT), it has begun to have two big but opposite effects on the debate over Universal Basic Income (UBI). Some people state MMT in an exaggerated way that implies the government can spend all it wants on UBI or anything else without ever raising taxes or borrowing money as if government spending had no limits of any kind. Other people refer to MMT while arguing that any effort to maintain a livable level of UBI is unsustainable. This article discusses the functional finance implications for the cost and sustainability of UBI, arguing that neither of those exaggerated implications are correct. MMT doesn’t free us for the concern for how to support UBI with taxes, but neither does it give reason to believe UBI is any less sustainable.

Financial Management Practices and Financial Performance of Table Banking Self-Help Groups in Kenya

Effective financial management is critical to the sustainability and growth of organizations, including support groups such as table banking groups. Table banking involves pooling members' financial resources to provide loans at reasonable interest rates to improve their socioeconomic status. This study examines the impact of financial management practices on the performance of self-help groups using the table banking model in Kenya. Theoretical frameworks, including monetary theory and financial theory, guide the investigation alongside empirical findings from previous studies. The study examines the importance of record keeping, debt management, credit assessment and cash flow management in improving the financial performance of table banking self-help groups. The results highlight the importance of these practices in maximizing savings, facilitating credit, and ultimately promoting economic empowerment within communities. The study concludes that financial management practices play a crucial role in shaping the performance of self-help groups engaged in table banking. By adopting effective strategies such as record keeping, debt management, credit assessment, and cash flow management, these groups can improve their financial stability, promote prudent lending, and ultimately contribute to poverty alleviation and economic development.

Alain Parguez and Monetary Circuit Theory: Keys to Understanding the Development of Economies with a Double Monetary Standard

The Monetary Circuit Theory is a key framework to understand the complexity of the insertion of countries with double monetary circuits into the international monetary circuits. In this article, we develop Parguez’s essential ideas for the study of developing countries precisely at a time when financial tensions are being exacerbated due to the pandemic and its consequences as well as to war conflicts internationally. In this essay, we collect the main contributions of Alain Parguez in relation to his theory of the double monetary circuit, which he had expressed in chapters of books published in English and French, later published in Spanish in the journal Ola Financiera and by the Latin American Council of the Social Sciences (CLACSO), as a tribute to a great economist interested in developing countries with a double monetary circuit. Delving into Parguez’s thought provides us with elements to understand monetary economies of production where a general global monetary equivalent coexists with a general equivalent assigned to a national monetary space. The causal relationship between both currencies determines the process of capital accumulation in developing economies, whose formation is anchored to the interests of economic agents that dominate the productive and financial markets.

Evolution of CBDC in the Context of the Institutional Theory of Money

There is currently a lot of discussion about the economic essence and differences between cryptocurrencies and other forms of digital money. An analysis of modern forms of money interpretations within national and international financial institutions also showed that approving an established typology is premature. The article proposes to look at the process of evolution of money from the point of view of the institutional theory of money. Accordingly, the variety of modern forms of money is due to varying degrees of control over the possibilities of issuing and establishing the rules for the functioning of money on the part of the payment community. Suppose the emergence of cryptocurrencies makes it possible to include a large part of the payment community in the decision-making process about the future of the payment system. In that case, central bank digital currencies (CBDCs) are, on the contrary, the highest form of alienation of the payment community, in which all questions of the existence of money are concentrated in the hands of the Central Bank. Even the existence of the banking system, traditionally involved in money circulation, becomes unnecessary. At the same time, the authors also examine the positive consequences of the gradual implementation of blockchain-based central bank digital currency in the Russian public procurement system.

Heterogeneous beliefs with information processing capacity constraints and asset pricing in a monetary economy

This paper proposes a monetary model to explore the influences of heterogeneous beliefs and information processing capacity constraints on the dynamics of asset prices. The capacity constraints not only influence the estimations of the capacity constrained investor, but also generate persistent disagreements among the investors. The model implies that reducing the levels of capacity constraints can alleviate the influences of heterogeneous beliefs and helps to stabilize financial markets. The model also reveals that introducing heterogeneous beliefs about both real and nominal sectors not only leads the stock with low monetary policy exposure to have significantly higher average return than the stock with high monetary policy exposure, but also can explain the mixed results about the relationship between the volatility and the risk premium of the aggregate stock market.