Money Supply plays an important role in macroeconomic analysis, especially in selecting an appropriate monetary and fiscal policy. Considerably, I am yet to come across theoretical work that has been done on this topic (analysis money supply and its impact on other variable i.e. inflation, interest rate, real GDP and nominal GDP). However some other topics similar to this one have been done by AL-SHARKAS, Adel, where he uses the same technique and models on the topic ‘out put response to shocks to interest rate, inflation and stock returns. His work investigates the relationship between the Jordanian output and other macroeconomics variables such as inflation, interest rate and stock returns. His paper employs the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships within the system. The empirical results indicate that Interest rate and inflation are weakly negatively correlated and real stock returns and inflation is very weakly positively correlated for all leads and lags are negatively associated. Furthermore, the response of output (IPG) to shocks in stock returns (R1) is strongly positive up to the first 6 periods and after which the effect almost dies. This indicates that the relationship between stocks returns (R1) and real activity (IPG) is positive and inflation has a negative impact on IPG (Adel A. Al-Sharkas 2004).
MONEY SUPPLY GROWTH AND MACROECONOMIC CONVERGENCE IN ECOWAS by WEST AFRICAN MONETARY AGENCY (WAMA) is a writes up similar to this topic. Where the relationship between money supply major macroeconomic indicator where investigated for countries in West Africa includi...
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...mploys the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships between money supply shocks and inflation the system.
the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.
The Poole Model extends the IS-LM model where it takes shocks into account. The monetary authority can either decide to set interest rates which would allow money supply to be determined by demand; or it could directly set the money supply, which would allow the interest rate to be determined by supply and demand for money. The aim of both of these is to minimize output volatility. Under these two methods, the level of output volatility is dependent on specific characteristics of the economy.
This commentary will evaluate the effects of expansionary monetary policy in Turkey. Expansionary monetary policy is the increase in money supply and interest rate (cost of borrowing or return from saving) manipulated by the central bank. The central bank is the monetary authority which controls the overall supply of money in an economy.
In their study, the correlation coefficient between price increasing rate and inflation is 0.6, which indicated there is a positive relationship. Instead, there is little correlation between share of decreasing price and inflation. (Figure 4) Meanwhile, Bunn and Ellis hold the point that the theory of time-dependent model is inconsistent with the changes on frequency of the price flexibility.
Monetary policy is an extremely valuable guideline for our economy. Small changes in the money supply can affect the price level, interest rates and almost all aspects of the macroeconomic world. When looking at monetary policy, understanding the variables of each argument can help us determine a more extensive view of each policy.
When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.
Studies have shown that many developing countries such as Singapore are experiencing inflation problems which is affecting economic growth. As economic growth is measured by the variations of Gross Domestic Product (GDP), it is essential to understand the causes of inflation and unemployment to further understand the variations such as recession and expansion. Several methodology such as the Aggregate Supply (AS) and Aggregate Demand (AD) model and Phillips Curve approach affects
So from all of this we see that money is defined mainly as a medium of exchanged but we also determined that it is the central bank which measures money. We also established why money is held and how it is linked with interest and inflation rates when positioned with bonds.
This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to the economy. This includes the role of the government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and their performance when applied to the third world countries with a huge informal sector.
The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
In 1956, Phillip Cagan wrote a classic article in which he developed a simple model for money demand. While the aim of Cagan’s article was to develop a theory for hyper-inflation, his model has been used far beyond this original application. Cagan-type money demand functions have become the standard base from which many monetary discussions begin. One such instance of its broader applications is seigniorage. The same year Cagan published his model, Martin Bailey, while at the University of Chicago with Cagan, expanded the Cagan money demand function to assess seigniorage, developing the well-known Bailey Curve (Bailey 1956).
Consumption is one of the basic needs of the human being. Where economic is the social science in which we study how to fulfill our basic needs with unlimited desires and scarce resources. These days’ major issue of generally any economy and particularly Pakistan economy is printing of lot of money i.e. increase in money supply. Now the question is how this increase in money supply affects the consumption expenditure in Pakistan? To get the answer of this question many scholars and authors such as Mushtaq, Ghafoor, Abedullah and Ahmed (2011), Choudhry and Noor (2009) and Zakaria (2007) examine the impact of money supply growth on consumption expenditure and found positive relationship between the both. Empirical studies by scholars like Mthuli Ncube and Eliphas Ndou (2011) have shown that there is no direct impact of money supply on consumption expenditure rather it effects the spending of consumer indirectly. Consumption can be changed due to change in interest rate i.e. initially change due to change in money supply. There are two ways through which interest rate can effect consumption expenditure one is direct and other is indirect way. Direct method shows direct impact of interest rate on consumption. The indirect method further operates in two ways. First change in interest rate has strong impact on demand of housing it means it will affect prices of housing so that shows change in wealth of household. In second steps that further lead to decrease in the consumption expenditure of people. The direct effect shows that increase in interest rate has income ...
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
In order to accurately and successfully forecast, investors analyze the economy in coordination with industry life cycles. The economies effect on an investment depends greatly on the businesses industry and life cycle. In addition, the government influences economic activity by controlling the supply of money. This economic control is accomplished by altering the reserve requirements and discount rates, through the monetary policy. As a result, the government can either incorporate an expansionary or contractionary monetary policy into the economy. An expansionary or loose monetary policy is sought to boost the economy by increasing money supply through decreasing the Federal Reserve. The expansionary act has been shown to
The “Four Way Equivalence Model” is a relationship between interest rates and inflation rates keeping in view the foreign exchange rates and also the changes that are expected to take place in spot rates. It gives the idea that how these things are interconnected and how increase in one factor would affect the other one and vice versa.
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.