Banii Conteaza

Money Matters
Florin V. Citu 6 March 2012, Money Supply and Inflation Seminar at the National Bank of Romania
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
3/7/2012
florincitu.wordpress.com
Money and Prices

400 1E+11
CPI
350
M1
9E+10 8E+10
300 7E+10 250 6E+10 5E+10
200
150
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
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30
80
130
180
230
280
-20 1991 1992
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1993
1994 1995 1996 1997 1998 1999 2000 2001
M1
Money and Inflation
2002 2003 2004
INF
2005
2006 2007 2008 2009 2010 2011
Money and Inflation

300 250 200
INFEOP
150 100 50 0 -50
50
100 M1GW
150
200
250
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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
3/7/2012
Sudden less money matters also

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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Can money explain this for Romania?

1E+11 9E+10 600
M1
8E+10 7E+10
NGDP
500
400 6E+10
5E+10
4E+10
300
200 3E+10 2E+10 100 1E+10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0
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M1 growth versus NGDP growth
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10
This is what NBR was seeing in 2008

Inflation was forecasted to fall
9,00 8,00 7,00 6,00 5,00 4,00 3,00
Feb-08 Aug-08
May-08 Nov-08
2,00
1,00 0,00 2008T3 2008T4 2009T1 2009T2 2009T3 2009T4 2010T1 2010T2 2010T3
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11
And on December 2008 NBR said

Inflationary pressures are not likely to subside next 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
3/7/2012 florincitu.wordpress.com 12
12,00
10,00
2,00
4,00
6,00
8,00
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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
Still key rate up almost 50% by Aug08
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
13
3/7/2012
0,00 1,00 2,00 3,00 4,00 6,00
5,00
-3,00 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
-2,00
-1,00
Leading to high restrictive real rates
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
14
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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15
100 000 000,0
3/7/2012
40 000 000,0 ian.. 2007 mar.. 2007 mai.. 2007 iul.. 2007 sep.. 2007 nov.. 2007 ian.. 2008 mar.. 2008 mai.. 2008 iul.. 2008 sep.. 2008 50 000 000,0 70 000 000,0 80 000 000,0 90 000 000,0
60 000 000,0
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
M1 (mii lei)
Then this followed
nov.. 2011
ian.. 2012
-20%
16
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
3/7/2012
80 000 000,0 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
Private Credit -6%
Private sector Credit (mii lei)
nov.. 2011
ian.. 2012
17
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20 000 000,0 ian.. 2007 mar.. 2007 mai.. 2007 iul.. 2007 sep.. 2007 25 000 000,0 30 000 000,0 35 000 000,0 40 000 000,0 45 000 000,0 50 000 000,0
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
Houshold (mii lei)
RON Denominated Credit
ian.. 2012
Corporate (mii lei)
18
And this was then
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19
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20
And this is Romanias contraction

80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 -10,0 -20,0
M1
Credit
3/7/2012
21
Still Romania
60 50
Households Ron
40
Corporate RON
30
20
10
-10
-20
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22
And the real GDP response

10 8
2007
-2
2008
2009
2010
2011
-4
-6
-8
3/7/2012
23
What happened in my view

NBR misdiagnosed the effect of the negative shock to aggregate demand from global crisis and the policy response was the wrong one: - NBR tighten monetary policy further after September 2008 by lowering the money supply, increasing the real rates, appreciating in real terms the domestic currency to deal with what it perceived to be excess demand and inflationary pressures in 2009 Much like in the Great Depression when money supply dropped by 1/3, a drop by 20% in money supply led to recession in 2009 and low growth since then
Could have been different?

Yes if money supply was a more important variable for monetary policy than the output gap Yes if FX interventions to protect RON would have been sterilized keeping the money supply unchanged Yes if NBR would have reversed much faster the tightening cycle in order to lower real rates faster
The real conclusions

For practical central bankers, among which I now count myself, Friedman and Schwartz's analysis leaves many lessons. What I take from their work is the idea that monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background"--for example 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 to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. (Ben Bernanke, November 8 2002)
TO BE CONTINUED
3/7/2012
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Money Matters

Money and Prices

300 7E+10 250 6E+10 5E+10

-20 1991 1992

Money and Inflation

Money and Inflation

150 100 50 0 -50

Sudden less money matters also

Can money explain this for Romania?

M1 growth versus NGDP growth

This is what NBR was seeing in 2008

And on December 2008 NBR said

Still key rate up almost 50% by Aug08

inf NBR rate

Leading to high restrictive real rates

But nominal rates lost meaning

100 000 000,0

Then this followed

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

Private Credit -6%

Private sector Credit (mii lei)

Houshold (mii lei)

RON Denominated Credit

Corporate (mii lei)

And this was then

And this is Romanias contraction

And the real GDP response

What happened in my view

Could have been different?

The real conclusions

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