Transcript
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Money Matters
Florin V. Citu
6 March 2012, Money Supply and Inflation Seminar at the National Bank of 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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Money and Prices
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0
1E+10
2E+10
3E+10
4E+10
5E+10
6E+10
7E+10
8E+10
9E+10
1E+11
0
50
100
150
200
250
300
350
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
CPI M1
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Money and Inflation
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-20
30
80
130
180
230
280
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
M1 INF
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Money and Inflation
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0
50
100
150
200
250
300
-50 0 50 100 150 200 250
M1GW
INFEOP
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Conclusions so far
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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Sudden less money matters also
Referring to the Great Depression Friedman andSchwartz argued that "the contraction is in fact atragic testimonial to the importance of monetaryforces [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 ofeconomic disturbance.
Or, in the short term if M falls PY can fall also
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Can money explain this for Romania?
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0
100
200
300
400
500
600
0
1E+10
2E+10
3E+10
4E+10
5E+10
6E+10
7E+10
8E+10
9E+10
1E+11
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
M1 NGDP
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M1 growth versus NGDP growth
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And on December 2008 NBR said
Inflationary pressures are not likely to subsidenext year
Excess demand will still be there, fuelled by
the recent hikes in personal incomes While Romania still enjoys significant
economic growth there is room for a relatively
smooth correction A restrictive monetary policy alone cannot
accomplish this task
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Still key rate up almost 50% by Aug08
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2,00
4,00
6,00
8,00
10,00
12,00
dec.06
feb.07
apr.07
iun.07
aug.07
oct.07
dec.07
feb.08
apr.08
iun.08
aug.08
oct.08
dec.08
feb.09
apr.09
iun.09
aug.09
oct.09
dec.09
feb.10
apr.10
iun.10
aug.10
oct.10
dec.10
feb.11
apr.11
iun.11
aug.11
oct.11
dec.11
inf NBR rate
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But nominal rates lost meaning
October 23 2008
NBR imposes a new rule to deal with market
anomalies in the interbank market:
For ROBOR rates 25% higher than the
Lombard rate the NBR temporarily suspend
the publication of the ROBID/ROBOR rates
The rule is still in place today
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Then this followed
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40 000 000,0
50 000 000,0
60 000 000,0
70 000 000,0
80 000 000,0
90 000 000,0
100 000 000,0
ian..2007
mar..2007
mai..2007
iul..2007
sep..2007
nov..2007
ian..2008
mar..2008
mai..2008
iul..2008
sep..2008
nov..2008
ian..2009
mar..2009
mai..2009
iul..2009
sep..2009
nov..2009
ian..2010
mar..2010
mai..2010
iul..2010
sep..2010
nov..2010
ian..2011
mar..2011
mai..2011
iul..2011
sep..2011
nov..2011
ian..2012
M1 (mii lei)
-20%
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Private Credit -6%
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80 000 000,0
100 000 000,0
120 000 000,0
140 000 000,0
160 000 000,0
180 000 000,0
200 000 000,0
220 000 000,0
240 000 000,0
ian..2007
mar..2007
mai..2007
iul..2007
sep..2007
nov..2007
ian..2008
mar..2008
mai..2008
iul..2008
sep..2008
nov..2008
ian..2009
mar..2009
mai..2009
iul..2009
sep..2009
nov..2009
ian..2010
mar..2010
mai..2010
iul..2010
sep..2010
nov..2010
ian..2011
mar..2011
mai..2011
iul..2011
sep..2011
nov..2011
ian..2012
Private sector Credit (mii lei)
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RON Denominated Credit
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20 000 000,0
25 000 000,0
30 000 000,0
35 000 000,0
40 000 000,0
45 000 000,0
50 000 000,0
ian..2007
mar..2007
mai..2007
iul..2007
sep..2007
nov..2007
ian..2008
mar..2008
mai..2008
iul..2008
sep..2008
nov..2008
ian..2009
mar..2009
mai..2009
iul..2009
sep..2009
nov..2009
ian..2010
mar..2010
mai..2010
iul..2010
sep..2010
nov..2010
ian..2011
mar..2011
mai..2011
iul..2011
sep..2011
nov..2011
ian..2012
Houshold (mii lei) Corporate (mii lei)
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And this was then
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And this is Romanias contraction
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-20,0
-10,0
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
M1 Credit
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Still Romania
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-20
-10
0
10
20
30
40
50
60
Households Ron
Corporate RON
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And the real GDP response
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-8
-6
-4
-2
0
2
4
6
8
10
2007 2008 2009 2010 2011
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What happened in my view
NBR misdiagnosed the effect of the negative shock toaggregate demand from global crisis and the policyresponse was the wrong one: - NBR tighten monetarypolicy further after September 2008 by lowering the
money supply, increasing the real rates, appreciating inreal terms the domestic currency to deal with what itperceived to be excess demand and inflationary
pressures in 2009
Much like in the Great Depression when money supplydropped by 1/3, a drop by 20% in money supply led torecession in 2009 and low growth since then
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Could have been different?
Yes ifmoney supply was a more importantvariable for monetary policy than the outputgap
Yes if FX interventions to protect RON wouldhave been sterilized keeping the moneysupply unchanged
Yes if NBR would have reversed much fasterthe tightening cycle in order to lower realrates faster
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The real conclusions
For practical central bankers, among which I now countmyself, Friedman and Schwartz's analysis leaves manylessons. What I take from their work is the idea thatmonetary forces, particularly if unleashed in adestabilizing direction, can be extremely powerful. The
best thing that central bankers can do for the world is toavoid such crises by providing the economy with, in MiltonFriedman's words, a "stable monetary background"--forexample as reflected in low and stable inflation.
Let me end my talk by abusing slightly my status as an official
representative of the Federal Reserve. I would like to say toMilton and Anna: Regarding the Great Depression. You'reright, we did it. We're very sorry. But thanks to you, wewon't do it again. (Ben Bernanke, November 8 2002)
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TO BE CONTINUED
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