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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

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    Money and Prices

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    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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    Money and Inflation

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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

    2008

    2009

    2010

    2011

    M1 INF

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    Money and Inflation

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    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 to

    Friedman and Schwartz, 1963]." Also Friedman said monetary policy can prevent

    money 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?

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    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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    And on December 2008 NBR said

    Inflationary pressures are not likely to subsidenext 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

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    Still key rate up almost 50% by Aug08

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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.09

    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

    inf NBR rate

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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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    Then this followed

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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

    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

    nov..2011

    ian..2012

    M1 (mii lei)

    -20%

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    Private Credit -6%

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    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

    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

    nov..2011

    ian..2012

    Private sector Credit (mii lei)

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    RON Denominated Credit

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    20 000 000,0

    25 000 000,0

    30 000 000,0

    35 000 000,0

    40 000 000,0

    45 000 000,0

    50 000 000,0

    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

    nov..2011

    ian..2012

    Houshold (mii lei) Corporate (mii lei)

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    And this was then

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    And this is Romanias contraction

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    -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

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    -20

    -10

    0

    10

    20

    30

    40

    50

    60

    Households Ron

    Corporate RON

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    And the real GDP response

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    -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 the

    money supply, increasing the real rates, appreciating inreal terms the domestic currency to deal with what itperceived to be excess demand and inflationary

    pressures 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 adestabilizing direction, can be extremely powerful. The

    best 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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    TO BE CONTINUED

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