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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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M
oneyan
dInflat
ion
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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
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 toFriedman and Schwartz, 1963]."
Also Friedman said monetary policy can preventmoney 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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This is what NBR was seeing in 2008
Inflation was forecasted to fall
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0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2008T3 2008T4 2009T1 2009T2 2009T3 2009T4 2010T1 2010T2 2010T3
Feb-08 May-08
Aug-08 Nov-08
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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 bythe recent hikes in personal incomes
While Romania still enjoys significanteconomic growth there is room for a relatively
smooth correction A restrictive monetary policy alone cannot
accomplish this task
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St
illkeyra
teupalm
ost50%
byA
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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. 09aug. 09
oct. 09
dec. 09
feb. 10
apr. 10
iun. 10
aug. 10
oct. 10
dec. 10
feb 11
inf
NBRrat
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L
eadingtohighre
strictive
real
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-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
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
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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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T
henthisfollowed
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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
Jan. 2007
Mar. 2007
May. 2007
Jul. 2007
Sep. 2007
Nov. 2007
Jan. 2008
Mar. 2008
May. 2008
Jul. 2008
Sep. 2008
Nov. 2008
Jan. 2009
Mar. 2009
May. 2009
Jul. 2009
Sep. 2009
Nov. 2009
Jan. 2010
Mar. 2010
May. 2010
Jul. 2010
Sep. 2010
Nov. 2010
Jan. 2011
M1(miilei)-2
0%
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P
rivateC
redit-6
%
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ress.com
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
Jan. 2007
Mar. 2007
May. 2007
Jul. 2007
Sep. 2007
Nov. 2007
Jan. 2008
Mar. 2008
May. 2008
Jul. 2008
Sep. 2008
Nov. 2008
Jan. 2009
Mar. 2009
May. 2009
Jul. 2009
Sep. 2009
Nov. 2009
Jan. 2010
Mar. 2010
May. 2010
Jul. 2010
Sep. 2010
Nov. 2010
Jan. 2011
PrivatesectorC
redit(miilei)
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RON
Denom
inatedCredi
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20,000,00
0.0
25,000,00
0.0
30,000,00
0.0
35,000,00
0.0
40,000,00
0.0
45,000,00
0.0
50,000,00
0.0
Jan. 2007
Mar. 2007
May. 2007
Jul. 2007
Sep. 2007
Nov. 2007
Jan. 2008
Mar. 2008
May. 2008
Jul. 2008
Sep. 2008
Nov. 2008
Jan. 2009
Mar. 2009
May. 2009
Jul. 2009
Sep. 2009
Nov. 2009
Jan. 2010
Mar. 2010
May. 2010
Jul. 2010Sep. 2010
Nov. 2010
Jan. 2011
Houshold(miilei)
Corporate(m
iilei)
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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 themoney supply, increasing the real rates, appreciating inreal terms the domestic currency to deal with what itperceived to be excess demand and inflationarypressures 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 a
destabilizing direc
tion,c
an be ex
tremely powerful. Thebest 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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