Money matters for growth in the short term

Florin Citu
June 2012 Bucharest Romania

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Money Matters
"If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated." David Hume Of Money M*V=P*Y

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M1 and CPI, a match made in heaven

400 1E+11

CPI
350

M1

9E+10 8E+10

300 7E+10 250 6E+10 5E+10 4E+10 3E+10 100 2E+10 50 1E+10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

200

150

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The story is not new

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It is TRUE: higher money growth is correlated with higher prices

300 250 200
INFEOP

150 100 50 0 -50

50

100 M1GW

150

200

250

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We all agree about the long run money inflation relationship

There is a positive relationship between money growth and inflation (.65 correlation coefficient) Not a surprise as most economists believe in the inflationary monetary policies Basically: no money no inflation

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What about the short term?

Referring to the Great Depression Friedman and Schwartz argued that "the contraction is in fact a tragic testimonial to the importance of monetary forces [p. 300; all page references refer to Friedman and Schwartz, 1963]." Also Friedman said monetary policy can prevent money itself from being a major source of economic disturbance. Or, in the short term if M falls PY can fall also
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Stock of money market deposits falls by half in October 2008

25,000.0

Depozite interbancare (stoc); volum (mil.lei) PMZ_VD

20,000.0

15,000.0

10,000.0

5,000.0

0.0 03.01.2006

03.01.2007

03.01.2008

03.01.2009

03.01.2010

03.01.2011

03.01.2012

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Money market interest rates

50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 03.01.2006

Depozite interbancare (tranzacii); rata dobnzii (% p.a.) PMZ_RT

03.01.2007

03.01.2008

03.01.2009

03.01.2010

03.01.2011

03.01.2012

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What did monetary policy do?

70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 -30.0

M1 (yoy%ch) Cash (yoy %ch)

Overnight deposits (yoy%ch)

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What does explain lower MM rates after December 2008?

23 octombrie 2008 Completarea normei privind funcionarea pieei monetare interbancare cu o prevedere destinat anomaliilor de pia: n cazul n care nivelul ratei dobnzii ROBOR depete cu mai mult de 25 la sut nivelul ratei dobnzii pentru facilitatea de credit a BNR, banca central poate suspenda temporar publicarea indicilor ROBID/ROBOR calculai pe baza cotaiilor bncilor participante n aceast situaie, BNR va publica indicii ROBID/ROBOR stabilii astfel: ROBID pe toate scadenele, la nivelul ratei dobnzii pentru facilitatea de depozit a bncii centrale; ROBOR pe toate scadenele, la nivelul ratei dobnzii pentru facilitatea de credit a bncii centrale

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Money and NGDP

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0.0

-10.0 10.0 20.0 40.0 50.0

30.0

Money, NGDP, RGDP

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NGDP RGDP M1

2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 0.00 10.00 20.00 30.00 50.00 60.00 70.00

40.00

-20.00

-10.00

Granger causality test shows that M1 does influence NGDP

Pairwise Granger Causality Tests Date: 06/06/12 Time: 00:15 Sample: 2001Q1 2011Q4 Lags: 3 Null Hypothesis: NGDP does not Granger Cause M1 M1 does not Granger Cause NGDP Obs 41 F-Statistic 0.40613 2.50910 Probability 0.74955 0.07526

Pairwise Granger Causality Tests Date: 06/06/12 Time: 00:17 Sample: 2001Q1 2011Q4 Lags: 2 Null Hypothesis: NGDP does not Granger Cause M1 M1 does not Granger Cause NGDP Obs 42 F-Statistic 0.80556 4.27513 Probability 0.45452 0.02136

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Granger causality test shows that M1 does influence RGDP

Pairwise Granger Causality Tests Date: 06/06/12 Time: 00:19 Sample: 2001Q1 2011Q4 Lags: 3 Null Hypothesis: M1 does not Granger Cause RGDP RGDP does not Granger Cause M1 Obs 41 F-Statistic 3.25432 1.10426 Probability 0.03349 0.36084

Pairwise Granger Causality Tests Date: 06/06/12 Time: 00:21 Sample: 2001Q1 2011Q4 Lags: 2 Null Hypothesis: M1 does not Granger Cause RGDP RGDP does not Granger Cause M1 Obs 42 F-Statistic 2.65023 1.73894 Probability 0.08401 0.18976

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RGDP responds positively after one quarter to an increase in M1

Response to Cholesky One S.D. Innovations 2 S.E.
Response of RGDP to M1
3

-1

-2 1 2 3 4 5 6 7 8 9 10

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NGDP responds instantaneously to an increase in M1

Response to Cholesky One S.D. Innovations 2 S.E.
Response of NGDP to M1
4 3 2 1 0 -1 -2 1 2 3 4 5 6 7 8 9 10

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Money and credit

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0

M1

Credit

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Money via MM and growth in the short term

Milton Friedman: Rapid increases in the quantity of money produce inflation. Sharp decreases produce depression. Sudden decreases affect short term growth via MM and the credit channel. Information offered by Money supply and its components should not be ignored, either in the short term or long term.
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