money matters, romania's case

8/2/2019 Money Matters, Romania's case

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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

3/6/2012 2florincitu.wordpress.com


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Money and Prices

3/6/2012 florincitu.wordpress.com 3

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


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?


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


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


-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


-20

-10

0

10

20

30

40

50

60

Households Ron

Corporate RON


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And the real GDP response


-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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