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8/9/2019 Monetary Policy[1] Morten Inezfix[1]

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Monetary Policy

Morten Gleditsch

Maria Ins Peixoto

Francois Ramiro

Long run correlations;money and prices during

hyperinflations


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Main objective

To investigate whether the quantity theory of

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

Recapitulation: MV = pq


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What is hyperinflation?

A rapid escalation of prices renderingcurrency virtually worthless as amedium of exchange


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Occurences

Dozens of examples, most oftenlyassociated with wars, economicdepression or political and socialinstabilities of other kinds

Data from Argentina, Bolivia, Israel andNicaragua were used in the analysisconducted in this work


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Methodology

Variables analysed: Annual % change of M3 andprices

Collect relevant data series Detect significant observations

Test whether the relationship between growthrate of money and prices excluding/includinghyperinflation data is one-to-one

Test whether for a broader sample of countries,hyperinflationary countries affect this relation


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Money and pricecorrelations


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Bolivia


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Basic linearregression


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Regression model

Used all the collected data series and thefollowing simple regression model:

Pricet = beta1 + beta2*Moneyt + Ut


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0

1000

2000

3000

0 500 1000 1500 2000 2500money

prices Fitted values

0

5000

1000

0

15000

0 2000 4000 6000 8000money


0

5000

10000

0 5000 10000 15000money


0

100

200

300

400

0 100 200 300 400 500money


Argentina Bolivia

NicaraguaIsrael

egress on resu s ngraphics


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Regression results in figures

For Argentina, Bolivia, Israel and Nicaragua numericalresults 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


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Testingsignificance of

hyperinflationary

period


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Test aim and procedure

To check whether there is a structural change in the modelduring the hyperinflation periods:

Model:

Pricest=beta1+beta2moneyt+beta3dummyt+beta4dummyt*moneyt+ut

Dummyt =

Null hypothesis: Hyperinflationary period causes no effect in

the relation between money growth and inflation

1 if t belongs to hyperinflationary period

0 if not


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Test results

Closer one-to-one relation without thehyperinflationary period

For all countries there was a statisticallysignificant structural change in themodel due to hyperinflationary period

In the extended model, coefficient of

determination increased, meaning thatintroduction of dummies improves theexplaination of the variation of inflation


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Testing influenceof

hyperinflationarycountries within abroader sample


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Methodology

Use of panel data analysis: Comparison ofvariables over years and over countries

Model:

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

Dummyit =

Null hypothesis: No structural change in themodel

1 if country i was subject to hyperinflation

0 if noti = country t= year


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Test results

Rejection of null hyphoteses: Hyperinflationarycountries do affect the overall relation of growth

in money and inflation

One-to-one relation within hyperinflationarycountries (beta2+beta4 = 1,03)


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Non-

numerical

assessments


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Hyperinflation causes

Argentina

- Public sector costs exceeded what thegovernment could raise in taxes or financethrough domestic and foreign borrowing.Interest payments became crushing

Bolivia

- Pursued the fiscal policy of coveringgovernment budget deficits by printingmoney for decades


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Hyperinflation causes

Israel

- Government - fearing the loss of publicsupport, focused on raising the standard

of living, increasing spendings andaccelerating inflation

Nicaragua- High debth level and reckless

governmental spendings


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Hyperinflation remedies

Argentina

- Pegging their national currency peso to theUS dollar

Bolivia

- Formulated a simple financial program to curbthe hyperinflation: Maintain a balanced

governmental budget by not spending morethan what was raised through taxes


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Hyperinflation remedies

Israel

- The government adopted the EconomicStabilization Policy: A total freeze of prices of allgoods and services

Nicaragua

- Monetary and fiscal policies as the ones used inBolivia

- Moreover, banking system's financial deficit cutsbacked by foreign aid, reestablishing confidencein the national currency and making creditavailable to the private sector


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Conclusion

During hyperinflationary periods less of theprice variations was attributed to the moneylevel as exogenous shocks were also affecting

Prices in all four countries were found to behighly affected by money, and in our broadsample of countries money do affect pricesaccording to the quantity theory of money forthe hyperinflationary countries


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Questions?

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