Monetary Policy

Long run correlations; money and

prices during hyperinflations

Morten Gleditsch
Maria Inês Peixoto
Francois Ramiro
 Main objective

• To investigate whether the quantity theory of

money is observable in time-series and cross-
country analysis

• Recapitulation: MV = ∑ pq
 What is hyperinflation?

• A rapid escalation of prices rendering

currency virtually worthless as a medium of
exchange
 Occurences

• Dozens of examples, most oftenly associated

with wars, economic depression or political
and social instabilities of other kinds

• Data from Argentina, Bolivia, Israel and

Nicaragua were used in the analysis
conducted in this work
 Methodology

• Variables analysed: Annual % change of M3 and

prices
• Collect relevant data series
• Detect significant observations
• Test whether the relationship between growth
rate of money and prices excluding/including
hyperinflation data is one-to-one
• Test whether for a broader sample of countries,
hyperinflationary countries affect this relation
Money and price
correlations
Bolivia
 1
.8

1985

1989

.8
.6

.6
Bolivia

Leverage
Argentina
Leverage
.4

.4
.2

.2
1990

1984 1984
1959
1961
1966
1965
1964
1963
1973
1972
1971
1970
1975
1977
1994
1993
1992
1991
1990
1989
1988
1987
1986
1997
1996
2008
2007
2006
2005
1962
1969
1968
1974
1976
1978
1981
1980
1983
1998
2003
2009
1958
1960
1967
1979
1995
1999
2001
2000
2002
2004
1957
1956
1982
197719831988
1985
1976
2001
1999
2000
2008
1995
1961
1971
2007
1969
1994
1997
1996
2005
2004
1965
1970
1998
2006
2009
2002
1962
1964
1963
1968
2003
1966
1993
1967
1974
1973
1992
1981
1980
1986
1972
1975
1982
1991
1978
1987
1979

0
0

0 .2 .4 .6 .8
0 .2 .4 .6 Normalized residual squared
Normalized residual squared
.8

.8
1988 1984

.6
.6

Israel Nicaragua
Leverage
Leverage

.4
.4

1990
.2
.2

1983
1985
1989 1980
1981
1982
1975
1978
1977
1980
1982
1992
2000
2006
2005
2008
1974
1981
1993
1999
1998
2004
2003
2002
2007
1976
1995
1985
1973
1979
1983
1996
1984
1997
2001
1994
1986
1987 1991 2003
2004
2006
2005
2002
2008
1958
1964
2007
1957
1966
1965
1995
1963
1998
2009
1969
2001
2000
1973
1988
1996
1989
1997
1961
1970
1999
1968
1959
1991
1990
1972
199319861978
1977
1967
1960
1976
1987
1974
1971
1975
19941979
1962
1992
1956
0
0

0 .2 .4 .6 0 .2 .4 .6 .8
Normalized residual squared Normalized residual squared
Basic linear
regression
 Regression model

• Used all the collected data series and the

following simple regression model:

Pricet = beta1 + beta2*Moneyt + Ut

 Regression results in graphics

15000
3000

10000
2000

5000
1000

Argentina Bolivia
0

0
0 500 1000 1500 2000 2500 0 2000 4000 6000 8000
money money

prices Fitted values prices Fitted values

400

10000
300
200

5000
100

Israel Nicaragua
0

0 100 200 300 400 500 0 5000 10000 15000

money money

prices Fitted values prices Fitted values

 Regression results in figures

• For Argentina, Bolivia, Israel and Nicaragua numerical

results were respectively:

- Money parameters: 1.47; 1.65; 0.83; 0.89 (beta2)

- P-values: 0.00; 0.00; 0.00; 0.00
- R-square values: 0.94; 0.99; 0.84; 0.95

• Assessments:
- Growth of money is statistically significant when explaining
inflations
Testing significance
of hyperinflationary
period
 Test aim and procedure
• To check whether there is a structural change in the model
during the hyperinflation periods:
• Model:
Pricest=beta1+beta2moneyt+beta3dummyt+beta4dummyt*moneyt+ut

1 if t belongs to hyperinflationary period

Dummyt =
0 if not

• Null hypothesis: Hyperinflationary period causes no effect

in the relation between money growth and inflation
 Test results
• Closer one-to-one relation without the
hyperinflationary period
• For all countries there was a statistically
significant structural change in the model due
to hyperinflationary period
• In the extended model, coefficient of
determination increased, meaning that
introduction of dummies improves the
explaination of the variation of inflation
Testing influence of
hyperinflationary
countries within a
broader sample
 Methodology
• Use of panel data analysis: Comparison of variables
over years and over countries
• Model:

• Pricesit= beta1+ beta2*moneyit+ beya3*dummyit+ beta4dummoneyit+ uit

1 if country i was subject to hyperinflation
• Dummyit = 0 if not
i = country t
= year

• Null hypothesis: No structural change in the model

 Test results

• Rejection of null hyphoteses: Hyperinflationary

countries do affect the overall relation of
growth in money and inflation

• One-to-one relation within hyperinflationary

countries (beta2+beta4 = 1,03)
Non-numerical
assessments
 Hyperinflation causes
• Argentina
- Public sector costs exceeded what the
government could raise in taxes or finance
through domestic and foreign borrowing. Interest
payments became crushing

• Bolivia
- Pursued the fiscal policy of covering government
budget deficits by printing money for decades
 Hyperinflation causes
• Israel
- Government - fearing the loss of public support,
focused on raising the standard of living,
increasing spendings and accelerating inflation

• Nicaragua
- High debth level and reckless governmental
spendings
 Hyperinflation remedies
• Argentina
- Pegging their national currency peso to the US
dollar

• Bolivia
- Formulated a simple financial program to curb
the hyperinflation: Maintain a balanced
governmental budget by not spending more than
what was raised through taxes
 Hyperinflation remedies
• Israel
- The government adopted the Economic Stabilization
Policy: A total freeze of prices of all goods and services

• Nicaragua
- Monetary and fiscal policies as the ones used in Bolivia
- Moreover, banking system's financial deficit cuts
backed by foreign aid, reestablishing confidence in the
national currency and making credit available to the
private sector
 Conclusion

• During hyperinflationary periods less of the price

variations was attributed to the money level as
exogenous shocks were also affecting

• Prices in all four countries were found to be highly

affected by money, and in our broad sample of
countries money do affect prices according to the
quantity theory of money for the
hyperinflationary countries
Questions?