Money Growth Research Articles

Monetary theory reversed: Virtual currency issuance and the inflation tax

This study develops a monetary model featuring (i) ‘virtual’ goods, sold against virtual currency, and (ii) agents providing payment services (miners), remunerated with newly issued virtual currency. Virtual money growth may have effects opposite to those predicted by monetary theory. Declining virtual currency issuance, like in Bitcoin, raises the price of virtual goods, which counteracts the traditional impact of a reduced inflation tax. The paper also shows that welfare improves as virtual currency issuance decreases, but only if the virtual currency growth rate is sufficiently larger than the fiat money growth rate.

Interest-rate setting and communication at the ECB in its first twenty years

To examine the role of ECB communication at press conferences, we estimate non-linear empirical reaction functions for the ECB's monetary policy decisions during the first two decades of monetary union and augment them with communication indicators on the risks to price stability and to growth. Overall, we find that the ECB's risk assessments at press conferences provided reliable orientation to observers concerning future policy decisions. Communication about the risks to inflation and to growth was more relevant for explaining future policy changes than the staff projections themselves. We also show that the ECB responded to risks to price stability in line with its primary objective and that its reaction function evolved after the global financial crisis, when money (or credit) growth lost its significance as a driver of the policy response. Our findings add to the understanding of the ECB's reaction function and the role of communication therein.

International Historical Evidence on Money Growth and Inflation: The Role of High Inflation Episodes

Abstract How long is the long run in the relationship between money growth and inflation? How important are high inflation episodes for the unit slope finding in the quantity theory of money? To answer these questions, we study the relationship between excess money growth and inflation over time and across frequencies using annual data from 1870 to 2013 for 16 developed countries. Wavelet-based exploratory analysis shows the existence of a close stable relationship between excess money growth and inflation only over long time horizons, i.e. periods greater than 16–24 years, with money growth mostly leading. When we investigate the sensitivity of the unit slope finding to inflation episodes using a “time-frequency-based” panel data approach, we find that low-frequency regression coefficients estimated over variable-length subsamples are largely affected by high inflation episodes occurring in the 1910s, the 1940s, and the 1970s. Taken together, our results suggest that inflationary upsurges affect regression coefficients, but not the closeness of the long-run relationship. This reconciles the validity of the quantity theory of money with the current disinterest of monetary policymaking in money growth.

Inflation risks and the global monetary boom

▀ Market nervousness about inflation has increased, in part due to strong monetary growth in the major economies. While we still think that the monetary boom is not a cause for anxiety, upside inflation risks have risen. ▀ Money growth has eased in the major economies in recent months but remains strong, mainly due to central bank asset purchases. Purchases are likely to fall in 2021 but will remain substantial. As a result, broad money growth in the major economies could remain at a double‐digit pace for a second year. ▀ Meanwhile, though private credit growth has indeed slowed, it's not clear it will move into negative territory as bank credit standards are not tightening the way they did after the global financial crisis. Reopening could provide a fillip, too. ▀ So far, rapid money growth has not translated into higher inflation because the velocity of money has fallen sharply. Central banks have to a large extent (correctly) been accommodating a much‐increased demand for liquidity. ▀ What happens to velocity in the next few quarters, however, is unclear. After the global financial crisis, velocity kept trending down, partly due to regulatory changes. But after the great depression and WWII, velocity recovered somewhat. Now, a release of forced savings and lower financial and economic risk might push velocity back up. ▀ A recovery in velocity, together with likely money and output growth rates for 2021, might be incompatible with low inflation. Inflationary upside might be slow to appear given inflation's inertial nature, but central banks will need to keep a close eye on inflation risk indicators over the next year.

A Markov-Switching Model of Inflation in Bolivia

The Bolivian inflation process is analyzed utilizing a time-varying univariate and multivariate Markov-switching model (TMS). With monthly data and, beginning in the late 1930s, inflation is accurately described by a univariate TMS. The intercept for the high-inflation regime is significantly higher than for the low-inflation regime and the actual inflation rate mirrors the smoothing probabilities of the Markov process. Additionally, the predicted duration of each regime closely fits the periods when the country experienced low and inordinate high inflation rates. From a long-run perspective and utilizing a multivariate TMS, the results generally fall in line with what the quantity theory of money predicts. In the high-inflation regime, money growth increases inflation (almost) one-for-one, as classical economics contends. From a short-run perspective and in the high-inflation regime, inflation is almost exclusively explained by a negative output gap. In the low-inflation regime, lagged inflation is the most important determinant of inflation, in line with price stickiness expectations. Partitioning the sources of inflation demonstrate that, from a long-run perspective and in the high inflation regime, differences in inflation are mostly explained by GDP growth; in the low-inflation regime, money growth and velocity growth are the principal factors explaining the variance of inflation. From a short-run perspective, the output gap explains almost all regression variance in the high-inflation regime, and past inflation does the same during times of low inflation, though in both cases the R2 is low which precludes making definite statements about the sources of variability in inflation.

Progressive consumption tax and monetary policy in an endogenous growth model

This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fractional liquidity constraint on consumption expenditures. When only the monetary authority operates, the unique steady state is locally indeterminate if the intertemporal elasticity of substitution in consumption is low enough. When the fiscal authority is introduced, the interaction of fiscal policy and monetary policy modifies significantly the stability properties. In particular, the fiscal authority could either stabilize or destabilize the economy depending on the tax progressivity, the strength of the liquidity constraint and the intertemporal elasticity of substitution. Our numerical examples further verify those theoretical results.

The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.

Money and inflation in inflation-targeting regimes – new evidence from time–frequency analysis

ABSTRACT This article investigates the post-1990 link between broad money growth and inflation in 16 full-fledged inflation-targeting regimes and four benchmark non-inflation-targeting regimes. This study employs the Christiano-Fitzgerald band-pass filter and continuous wavelet transform to analyze the co-movements across operational horizons and time. According to the band-pass filtering techniques, the link between money growth and inflation was weak and statistically nonsignificant over the investigated period: from 1990 onwards. The wavelet analysis demonstrated significant causality running from money growth to inflation, and strong significant co-movements between the two variables around the Great Recession at a typical business cycle frequency. This finding suggests that policymakers may need to respond to the short-run surges in money growth by reducing money growth rates. The empirical findings support the proposal that policymakers should return to a monetary framework that controls the money supply.

Attributes of farm income operating on conservation agriculture: The multivariate and artificial neural network (ANN) analytics

Conservation agriculture (CA) is the combination of environmental management, modern and scientific agriculture which employs farmers’ ability to utilize, innovate, and adapt to changing situations, as well as their holistic acceptance of knowledge along with ensuring sustainability. 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 land yields good results to everyone, confers good health on the entire family, and causes growth of money, cattle, and grain. The present study depicts hard evidence by identifying marker variables impacting income augmentation through conservation agriculture. A score of 50 farmers has been selected from two blocks of Cooch Behar district of West Bengal, by non-probability snowballing sampling techniques with a total of eighteen independent variables along with income from major crop is used as the dependent variable through a structured interview schedule. A basket of multivariate analytical techniques has been applied along with Artificial Neural Network (ANN) as well. The results depict that a blend of diversified farming and farming experiences in CA contributed immensely to scale up income from conservation agriculture approaches.

Okay Boomer... Excess Money Growth, Inflation, and Population Aging

Is inflation a monetary phenomenon? In the decades since the influential work of Milton Friedman, the great moderation has seemingly put to bed the idea that monetary aggregates serve as a useful tool for policy makers. While many point to a structural change in the underlying relationship between money growth and inflation, there is limited understanding as to why this monetary transmission has broken down. In this paper, I provide evidence that population age structure has an important impact on the relationship between excess money growth and inflation. Estimating these effects using a long run sample of data, I find that the one-to-one relationship between excess money growth and inflation implied by the quantity theory appears to hold over long horizons, with short-to-medium run effects that are smaller, but significant. I then show that changes in the population age structure, particularly as the baby boomer generation has moved through it, can explain a strengthening of this transmission during the highly inflationary period of the 1970s, as well as a complete disappearance during the 1990s and early 2000s. At present demographic headwinds on this relationship seem to have abated, with their effect opening the door for a potential return to money driven inflation.

Monetary policy effectiveness in the liquidity trap: a switching regimes approach

Liquidity trap economics seems to have fared particularly well on all counts of its predictions, in the aftermath of the 2008 global financial crisis. Therefore, in this paper we evaluate formally the effectiveness of unconventional monetary policy in a liquidity trap, based on data from Japan, the USA, and the eurozone over periods of liquidity trap conditions (1994–2018 for Japan and 2009–2018 for the USA and the eurozone). Under effective unconventional policies, changes in the base money-growth regime should be associated with similar regime changes in either inflation or investment expenditure growth and the estimation of a switching regimes model allows us to test whether significant joint regime shifts occur in the data. Also, a test of liquidity trap conditions is based on a discrepancy of regime shifts between growth rates of base money and broad money, since this implies a collapse of the money multiplier. Our findings show that drastic shifts in the growth rate of the monetary base do not produce similar behavior for the inflation rate, investment expenditure growth, and broad money growth, thus pointing to liquidity trap conditions and unconventional monetary policy ineffectiveness.

Factors Explaining Exchange Rate Volatility in Nigeria: Theory and Empirical Evidence

The study empirically investigated the factors explaining the volatility of the bilateral exchange rate of the naira to the U.S. dollar, using data for 1970-2013 period. The EGARCH (1,1) modeling technique was used. The empirical evidence indicated that volatility of the naira exchange rate was characterised by clustering, strong leverage effect and moderate degree of persistence. It was found that increased net capital flows, greater integration of the Nigerian economy into the global market, deepening of the nation’s financial system, favourable crude oil prices, increase in the level of external reserves as well as economic growth were germane to dampening conditional volatility of the country’s exchange rate. It was also found that external debt and monetary expansion had the potential to exacerbate volatility in the exchange rate. Policies recommended to mitigate volatility of the exchange rate included greater integration of the economy into the global market, which implies diversification of the country’s export base, less reliance on external borrowing, building up and maintaining a robust external reserves position, financial system development and use of contractionary monetary policy to control broad money growth.

Expansion Killed the Price Stability: Simple Statistics on US Monetary Policy and the Great Inflation

The Great Inflation was America's most recent bout of permanent excessive price level growth. I review the literature on the subject and construct a model of inflation during the period synthesized from the Phillips Curve and Quantity Theory of Money. I then run regressions to evaluate the relationship between money and inflation during the period. I then test my model, finding money growth to be the most explanatory factor of inflation during the period, or that expansion killed the price stability. Lastly, I conclude with recommendations for future research.

Of Votes and Viruses: The UK Economy and Economic Policy Uncertainty

This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the United Kingdom'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 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.

The Equilibrium Value of Bitcoin

Can the value of a cryptocurrency be uniquely determined by the fundamentals, such as the rule for money growth implicit in the design of the protocol? To answer this question, we construct a recursive asset-pricing model for a single fiat cryptocurrency, similar to actual Bitcoin. We think of our model as an ideal laboratory, in which equilibria correspond to model solutions that can generate actual data. Our approach stresses the role of the value function as an object of rational choice and hence rests on solid micro-foundations. By imposing enough economically motivated restrictions on that choice, we are able to pin down unique equilibrium and hence demonstrate that the value of our cryptocurrency is immune to self-fulfilling expectations. This result depends only on the design of the cryptocurrency protocol.

Central Bank Digital Currency: a Review and Some Macro-Financial Implications

Central Bank Digital Currency (CBDC) has become a major policy interest among global central banks. However, its introduction faces many challenges including those that are legal, technological and political in nature. In this paper, we summarize those challenges and add a few more that have not received much attention in the literature. Relying on the historical evidence of past episodes of financial innovation we explore the hypothetical impact of CBDC based on institutionalist hypothesis and McCallum’s rule of money growth which is well suited to studying the possible macroeconomic impact of CBDC. According to our simulations, the introduction of CBDC need not pose an inflation control problem but financial stability issues aren’t fully offset. We also provide some policy implications.

The Dynamics of the House Price-to-Income Ratio: Theory and Evidence

The house price-to-income ratio (PIR) is widely used as an affordability indicator. This paper complements the cross-sectionally focused literature by proposing a tractable model for the PIR dynamics. Our model predicts that the PIR is very persistent and is correlated to the lagged aggregate output. Cross-country analysis confirms this prediction and provides evidence for a long-term, positive and significant relationship between PIR and aggregate production. Our results hint at the construction of an early warning system for housing market mispricing. Our tractable formulation of a stochastic money growth rule may carry independent research interest.

Conventional Monetary Policy Re-Estimated

We propose a new method of identification of the monetary policy rule. Using this method, we argue that, before the Great Moderation, the Federal Reserve implemented the Friedman policy of steady money growth as could be interpreted and adopted by the policymakers in the 1960s and 1970s. During the Great Moderation, the monetary policy follows the Taylor rule with interest rate smoothing instead, where the type of smoothing is more general than discussed in the literature. The estimated impulse response functions for the monetary policy shock are large and significant, even when they are estimated on the Great Moderation data.

Anticipated versus unanticipated productivity shocks and hours-worked

We analyze the relationship between output and hours-worked in the event of anticipated and unanticipated productivity shocks. We develop a small open economy model that includes imported inputs, a cost channel of monetary policy transmission, real wage rigidity, and a central bank that targets inflation, output, and money growth. Both analytical solutions and quantitative simulations confirm that an unanticipated shock generates real exchange rate depreciation, increases output, and decreases both domestic inflation and interest rate. The model generates a positive co-movement between output and hours-worked only when the shock is anticipated, prices are flexible, and monetary policy is sufficiently accommodating.

Macroeconomic instability and targeting rules for monetary policy in an endogenously growing small open economy

AbstractBy using the feature that money can lower unit transaction costs, this paper develops a monetary endogenous growth model for a one‐sector small open economy, and uses it to examine the possibility of the occurrence of belief‐driven fluctuations. It is found that the emergence of belief‐driven fluctuations is crucially related to targeting rules for monetary policy. More specifically, when the monetary authorities target the specific money growth rate, macroeconomic instability generated by belief‐driven fluctuations can arise even if labor externalities are totally absent. This finding runs in sharp contrast to the Benhabib–Farmer assertion needed for the occurrence of belief‐driven fluctuations. It is also found that, when the monetary authorities target the specific inflation rate, macroeconomic instability generated by belief‐driven fluctuations can never prevail regardless of the extent of the unit transaction costs.