monetary policy[1] morten inezfix[1]
TRANSCRIPT
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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
prices Fitted values
0
5000
10000
0 5000 10000 15000money
prices Fitted values
0
100
200
300
400
0 100 200 300 400 500money
prices Fitted values
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?