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The Relationship Of Money Supply On Output Economics Essay

The literature review of this chapter is to show the existing literature on the relationship of money supply on output as many researchers have their own view on the relationship of money supply on output based on their empirical result in different country.
Shanmugam et al (2003) investigated the nature of money supply in Malaysia by using Co-integration and the error correction model. Objective of their study is to identify endogenous money supply hypothesis in Malaysia from year 1985 to 2000. From their finding that based on empirical test, there was bidirectional causality between bank loan and money supply (M3). This would imply the nature of money supply in Malaysia was endogenous over the year from 1985 to 2000. This can be conclude that money supply in Malaysia may not suitable to regard it as a leading indicator for monetary policy, which means money supply cannot predicts the movement of output in the future. However, based on the result of error correction model, it showed the money income and money supply (M3) have bidirectional causality in long run. The bidirectional causality between bank loan and money supply (M3) support the view of accommodation and liquidity preference. The absence of causality between bank loan and M3 multiplier imply money supply of Malaysia did not support the view of structuralism. Endogenous money supply of Malaysia is consistent with the hypothesis of Post Keynesian that money supply is endogenous.
Badarudin et al (2009) investigated the behavior of money with comparative analysis. The objective of their study is to show empirical evidence on money-loan causality among 10 emerging countries. They point out the limitation of previous studies such as previous studies just focus on single country, did not provide comparative analysis with other countries, and some studies like the case in Malaysia was limited to pre-recovery data. Therefore, they remove these limitations by using latest data and 10 emerging countries for this study. They also point out the different between endogenous money and exogenous money. Exogenous money means that the Central Bank can determine the money supply to promote economic growth while endogenous money determined by demand for money and domestic credit, which control the quantity of money supply. In conclusion, their empirical result found that money supply for China, the Czech Republic, India, Malaysia and Turkey were endogenous but exogenous for Mexico. However, there was no causality for Indonesia, Russia and Taiwan. Thailand showed endogeneity in long run.
Tan and Baharumshah (1999) investigated the causal nexus of money supply, real output, interest rate, and inflation in small but fast growing country economy—Malaysia. Objective of this study was to identify the most appropriate intermediate target to curb inflation and sustain economic growth. Based on their result, they point out that M3 would be the most appropriate intermediate target for monetary authorities to sustain high rate of economic growth due to M3 has a strong effect on real output but moderate effect on price level. However, if the objective of authorities were to curb inflation, then M1 would be the most appropriate intermediate target due to it has more effect on price level if compared to M3. Since M1 has Granger causality with real output, therefore monetary authorities have to find the equilibrium between the stability of price level and economic growth. They also point out that the M2 did not lead price level in short run but it respond to change in price level. This is the reason why Bank Negara switches from M2 to M3 as monetary target.
Shan and Qi (2006) doubt whether the financial development will lead to the economic growth in the case of China due to it could help in an evaluation of financial deregulation that has spurred the economic growth of many western countries. Moreover, it could give some guidance whether the financial development is necessary for a high growth rate in developing countries. Therefore, their objective was to identify the effect of financial development on economic growth in China. From the result, they found out the trade has more effect than investment, which means the openness of an economic would promote economic growth. Moreover, they found that labors have contributed most to economic growth in China, which mean primarily source of economic growth comes from the extensive use of labor. At the same time, financial development has brought credit to the China. However, the total credit was also primarily source of economic growth means that it also comes from extensive use of credit. Therefore, they concluded that financial development as the second force in leading economic growth in China after the contribution from labor input.
Pradhan (2009) investigated the causal nexus between financial development and economic growth in India. The main objective of his study was to identify the short run and long run dynamic between financial development growth and economic growth. Co-integration test has confirmed that financial development and economic growth have a long run relationship. Granger test has also confirmed the financial development and economic growth are interdependent in India over the year 1993 to 2008 but unidirectional causality exists from market capitalization to economic growth, foreign trade to economic growth, money supply to market capitalization, and bank credit to market capitalization. The foreign trade and bank credit have no causality. In conclusion, the bidirectional between financial development and economic growth imply that financial development could be used to accelerate economic growth and economic growth could be used to generate financial development in the economy. Therefore, they both could be used to maintain sustainable economic growth.
Ang (2008) investigated the mechanisms linking financial development and economic growth in Malaysia. The objective of his study was to estimate a six-equation model of financial development and economic growth in Malaysia. By using co-integration test that based on the Auto-regression Distribution Lag (ADRL), the result showed that financial development has positively impact on economic growth by promoting entrepreneurs credit for the adoption of new production technology. However, promote both private saving and private investment will affect the financial development. He point out financial development could promote economic growth by increasing financial activity. Economic development will lead to an improvement in the financial system. Therefore, there was bidirectional causality. Financial development lead to higher growth through the efficiency of investment improvement is consistent with the hypothesis of endogenous financial development and growth model. In conclusion, he mentions the government should ensure the soundness of financial system to provide confidence to saver so that the resource could be used effectively to promote economic growth. Moreover, creditable and reliable support system could smooth the function of the financial system.
Masih and Masih (1996) point out according to monetarist, money supply is the cause and the price is the effect but the structural view excessive money supply as permissive rather than a cause to inflation. Their objective was to identify the question of causality between money and prices. The result showed that price (CPI and WPI) is the leading variable while money supply (M1 and M2) is the lagging variable, which means the price that leads money, and not the other way around. However, five variables were used in multivariate test. The result showed that the five variables are bound together by two long run equilibrium relationship. Moreover, the result also showed the most exogeneity variable is interest rate but under the control of government. Therefore, price is the most exogeneity variable among the four variables. However, money (M1 and M2) did not affect CPI either in short run or in long run. The analysis of the impulse respond function showed that a shock in money supply (M1) has relatively the least effect on price. In conclusion, they conclude that the price was the leading variable as the structuralist maintain and not consistent with the view of monetarist in the case of Pakistan.
Ibrahim (2005) investigated the sectoral effect of monetary policy. The objective of his study was to identify the effect of money supply on aggregate output and eight sectoral outputs for Malaysia. From his finding, positive shock of interest rate affect the manufacturing, construction, finance, insurance, real estate and business service sectors have a greater impact than aggregate production which mean they respond to monetary shock. However, three sector (agriculture, forestry and fishing; mining and quarrying; and electricity, gas and water) were not affected by interest rate shock which did not respond to monetary tightening. The result of the two sectors which are transport, storage and communication; wholesale and retail trade, hostel and restaurant are sensitive to interest rate. In conclusion, his empirical result has found the evidence to support the real effect of monetary policy on money-income causal nexus. Contractionary money supply will lead to positive shock in the interest rate (increase in interest rate), and the real output will decline and bottom out after 12 quarter. Therefore, inflation in Malaysia is a monetary phenomenon and implies that the money supply positively related to output.
Tan and Cheng (1995) investigated the causal nexus of money, output, and price in Malaysia. They point out the policy complexity and dilemma faced by Bank Negara; it would be helpful if the causal nexus between money, output, and price could be revealed. Therefore, the objective of their study is to hope to address the issue econometrically and conduct inferences on policy implications. From their empirical finding, first there exist bidirectional direction between money supply (M1, M2, and M3) and nominal output. Second, M1 used to contribute inflation at consumer level but reverse for M3. This would imply than inflation is actually a monetary phenomenon. Third, money supply (narrow or broad) have a strong effect on real output. In conclusion, Bank Negara may control the price stability at producer level but not consumer level unless the target is on narrow money supply (M1), therefore the result imply tighten money supply (M1) is likely to soften the Malaysia economy.
Ogunmuyiwa and Ekone (2010) the objective of their study is to identify the effect of money supply on economic growth in Nigeria. From the O.L.S method, the result showed that the money supply has negative related to GDP that negate his finding in the previous literature that mention positive money-output relationship. However, the structural adjustment dummy is positive and significant determined of GDP suggest that money supply is conductive for economic growth in Nigeria. Finally, form his regression result, the interest rate show real GDP as its significant determinant. This would imply that economic growth is influence by money supply. Although the result supports the money supply and economic growth is positively related. However, the causality test based on error correction model showed that the money supply do not has a sufficient evidence to explain the growth of real GDP in short run or even in long run. The choice between contractionary and expansionary money supply is also insignificantly respond to economic growth rate.
Tomsik and Viktorova (2006) identify the relationship between money and output in the Czech Republic. The objective of this study is to analysis the effect of monetary phenomenon on real economy. From their result, which based on Granger causality, real money supply did not cause real output in the Czech Republic. However, the real output could cause the real money supply. This means an increase in output will lead to an increase in real money supply. Therefore, they point out the monetary authorizes should not use real money supply to influence real output. The second result of Granger causality showed the real interest rate cause real output. From their finding, it showed the real output to the interest rate has a significant respond. Moreover, money supply (M2) cause respond in real exchange rate but not fully consistent with monetary theory. In conclusion, the real output growth is determined by real interest rate not real money supply. In the other hand, an increase in money supply will lead an decrease in interest rate, finally the decrease in interest rate will increase the economic growth, although money supply could not really determine the economic but it can be describe money supply has a positive relationship to output.
Suleman et al (2009) investigated the relationship between money supply, government expenditure, output, and price. Their main objective tends to identify the long run relationship between money supply (M2), inflation, government expenditure and economic growth for Pakistan. From their empirical result, government expenditure and inflation negatively related to economic growth in long run. However, money supply (M2) was positively affecting the economic growth in long run. The reason for negatively relationship between government expenditure and the inflation due to the government expenditure was non-development expenditure and the inflation was affected by adverse supply shock (cost-push inflation). Moreover, deficit financing by government will lead to more liquidity effect and inflation problem to the economy in case of Pakistan, they suggested that State Bank of Pakistan (SBP) to control the growth rate of money supply due to excess growth of money supply would lead to inflation on economic growth. Therefore, the growth rate of money supply should be according to the real output of economy.
Isik and ACAR (2006) doubt about the openness influence the effectiveness of monetary policy. Therefore, his objective was to examine the relationship between openness and the effectiveness of monetary policy on output. From his study showed that the more open the economy, the effect of money supply on output is weaker. He point out the expansionary of money supply positively affect the output was consistent with the view of monetary policy that monetary variable can affect real variable in short run but not in long run. He also point out the effect of expansionary of money supply on output is less in developing countries than developed countries due to the develop countries have deeper and more stable. Therefore, they can control the money and capital market better than the developing countries. Moreover, the stability of politic and economic financial, alternative of tools to control money to increase output, and central banks that are more independent contributed to low risk and low possibility of capital flight in developed countries whereas the developing countries have unstable and vulnerable money and capital market will be making monetary policy implementation become less effective. Furthermore, the higher risk for developing countries is due to the political and economic instability, which is the cost of borrowing have negatively affect the investment. Moreover, an increase in money supply will lead to a fall in the interest rate. Therefore, increases the possibility of capital flight, which reduce the credit for investment, finally the output will decrease.
Wane (2010) point out recent research has shown the effect of money supply on output was asymmetric which was the monetary contraction reduce output more than monetary expansion that raise output. Therefore, his objective was to identify the effect of monetary policy on output in France, Germany, Italy and the United Kingdom was asymmetric or not. From his co-integration result showed there is a long run relationship between output, money supply, price of oil and interest rate in both countries. The co-integrating parameter was consistent with the economy theory prediction, which the parameter is positive, but less than one. The asymmetric adjustment test showed that the effect of monetary policy on output was asymmetric in all countries. However, the impulse response function showed the result was consistent with a dynamic asymmetric in the behavior of money supply movement in all countries. From his empirical result, he found that the negative money supply shock affect output was greater than positive money supply shock in France and Italy. However, the positive money supply affect output is greater than negative money supply shock in Germany and United Kingdom.
Chang et al (2009) point out China has achieved a long-term economic growth over the past 30 years. His objective was to examine effect of money supply on real output and inflation in China from 1993 to 2008. He mentions that according to the mission statement by People’s Bank of China, the objective of monetary policy in China is to ensure the stability of currency value so that promote economic growth. From their studies, they found that the effect of money supply on output and price that the real output growth of China respond to negative money supply but not positive money supply. Moreover, the inflation responds to positive money supply but not negative money supply. By using M2, the real GDP growth respond to positive money supply and inflation did not respond to both negative and positive money supply. Therefore, in conclusion, they mention there were two important policy implications for China. First, an increase in money supply did not promote the economic growth. However, it would increase the inflation to higher rate (in term of M1). Second, a decrease in money supply can help to cool down an overheated economic growth in order to promote a steady economic but did not help to curtail inflation.

The Standard Of Living In Developing Countries Economics Essay

I will be carrying out a study to identify the pros and cons of global free trade which is raising the standard of living in developing countries, but firstly it is important to identify what is meant by free trade, standards of living and the definition of developing country.
Free trade is an ideal that the World Trade Organisation (WTO) has been striving to attain since its foundation 60 years ago. Free trade is a system that encourages all countries to produce and export what it is best at. If applied fairly and collectively, free trade should benefit all. Trade between various countries of the world which enables people to attain food and materials that they cannot produce for themselves without the interference of the government.
Raising standards of living
Higher incomes are one of the signs to rising standards of living, there are, however many more aspects to the standards of living of an individual, one reason is education. Education does not only let the workforce become more productive but also increases the ability of the individual to enjoy and appreciate their culture. Another example such as working. Access to working does not only provides an income but also provides self-esteem and purpose of working. Rising living standards are also linked to the ability of people to contribute in society. The poor are not given that opportunity as they do not have the income to buy.
Developing countries
Developing countries are countries that have a low standard living; these countries usually have a low gross national income per capita even though they are in an economical development. They also have a high gross domestic product per capita. Another economic measure is also industrialization. A number of international organizations like the World Bank have researched many developing countries and one of the developing countries is china. They also researched developed countries which are countries with a higher GAI per capita such as the USA and United Kingdom. The World Bank investigates all the countries around the world and it researches in what category the countries fit in, there are three main categories which are low income, middle income and high income countries. Most countries fall in low income group and middle income groups, few countries fall in the high income group.
Now that we have established the three main factors of the statement it is important to understand that the world is becoming more globalized. Globalization is an ongoing process in which countries are becoming more integrated in terms of social, cultural and economical factors. The current form of globalization involving free trade and open markets are facing much disapproval. Democratic countries are affecting elected leaders abilities to make decisions in the interests of their people.
I will now be arguing the pros and cons on global free trade and how it is raising the standard of living in countries.
Due to globalization one of the advantages is that free trade between countries is increasing because countries are effectively becoming more similar due to the fact that many countries are becoming more self-sufficient.
The developing world uses more efficient resources, this means that all the countries that are involved in free trade are at profit.
As an outcome in most countries prices are low, employment will increase and therefore there will be an increase in income and higher rates of economic growth for the countries who are mainly involved in free trade that experience rising living standards.
Some developed regions are progressed at the costs of other developed regions; this means that there is a threat to other regions.
Because globalization is increasing, skills and technologies enable to increase the living standards throughout the world.
In many countries population has increased due to the fact that in two decades, from 1981 to 2001 people surviving on 1$ or less per day increased.
In many developing countries population decreased from 40% to 20%. War between developed nations is likely to reduce
Immense easiness and pace of shipping for supplies and citizens.
There is competition with other businesses; in this case competition fosters lower prices which are efficient in production and innovation but other benefits are that employment may decrease and people will become more desperate for jobs and they will accept lower wages, so therefore business owners will no longer have to compete for labour. This also means that it will allow businesses to offer sub-standard salaries, benefits and working conditions.
In many developing countries there is more of a strict rule, i.e. drug problems, immigration problems etc are looked at with awareness.
Free trade allows companies a better supply of raw materials at a lower price. This allows them to cut down their expenditure and be more economical on the global market.
The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth.
Decreases in ecological reliability as polluting corporations that benefits of frail dictatorial regulations in developing countries
Larger threat to nations of diseases being transported unintentionally.
There is a huge threat to many jobs, jobs are mainly lost due to the fact that growing imports
There could also be a change or even a loss in culture in many developing countries such as historic values
Many developing countries will usually struggle with international competition but if they wish to invest within the industry then in the future they may be able to gain comparative advantage.
Many developing countries need to rely on primary products because there is a chance for them to gain comparative advantage, however the disadvantage in this factor is that the prices can vary due to many environmental factors, so therefore if developing countries just stick to primary products then they should bare in mind that goods will have a low earnings flexibility of demand so therefore economic growth demand will only increase slightly.
Developing or new industries may find it rather difficult to become conventional in a competitive atmosphere with no short-term protection policies by the government.
Free trade in developing countries can direct to pollution and many environmental problems as companies fall short to comprise these costs in the price of goods.
Crime rate is increasing, the rate of unemployment is also rising, and more the twice as many people will expectedly lose their homes. The number of homeless people is rising and a lot of young people are using illegal drugs. There is also a significant rise in illegal immigrants entering countries subtly.
Many people who are retired or will be retiring later on in life are becoming penniless; people are going more in to debts because the rate of inflation of the prices for everything is increasing really quickly.
In this paragraph I will be discussing how developed countries such as the U.S benefit from developing countries around the world. Firstly I will be talking a bit about the U.S and how it is taking advantage of developing countries such as china.
Globalization is hard to sell to average people, when developed countries sell more overseas, this is more likely for businesses to employ more people.
The U.S first free trade agreement was with Israel in 1985. This agreement was provided for the elimination of duties for goods, apart from certain agricultural products from Israel entering the U.S. This U.S agreement allows the U.S products to compete on an equivalent foundation with European supplies, which have free entrance to Israeli markets. The second U.S free trade agreement was with Canada which was in 1988.
As the U.S is already a developed country, it takes more advantage of developing countries such as china. China and the U.S both agreed to china joining the world trade organisation (WTO). This was however a great impact to china because when china opened up its markets the economics would improve. It also strengthened the authority of the world trading system, which has been damaged by disputes between the United States and Europe. The disadvantage to china for joining the (WTO) is that china’s employment could have risen greatly and that competition would increase greatly too. The US has been approaching China to unwrap its markets to American products and services. The U.S take advantage of china because china are working less than slave labour prices to manufacture goods for the U.S, The Chinese produce goods cheaply, because their people are numerous and relatively poor. When this occurs the U.S then sells the products for normal prices, so this means cheap labour and a higher profit margin for the U.S. This is however not fair on china as it is a very poor country.
The pros for U.S free trade is that free trade will increase their sales and profit for U.S businesses, this will also reinforce the economy, deduction of prices and delaying trade barriers, such as tariffs, quotas and conditions, essentially this leads to easier and swifter trade of consumer supplies. This will then result in an increased volume of sales for the U.S. The U.S also uses less expensive resources and labour is required through free trade which leads to a lower cost to manufacture goods.
Free trade creates middle-class jobs over the long term period, U.S businesses tend to grow from increased sales and profit margins, demand will actually rise for middle-class people to smooth the progress of sale increase. Free trade is also an opportunity for the U.S to offer financial aid to some of the poorest countries.
The cons for U.S free trade is that Free trade has caused many losses of jobs for the U.S especially higher paid jobs and that many free trade agreements are bad deals for the U.S.
The U.S has also harmed many countries around the world as well as employees in other countries who are being oppressed and damaged. The environment in other countries is being ruined so this states that free trade is not good for the U.S, this also means that the American employees cannot comparatively compete with cheap labour for the reason that the expenses of living in these other countries are so small compared with the U.S.
The system we have today means that developed countries can protect their markets whereas the developing countries cannot protect their markets, the cost of this for people in developing countries is very devastating. This means that they are Unable to sell their goods, and therefore they cannot make enough money through trade. Meanwhile, their own producers are going out of business because of unfair competition.
My point of view is that If China really wants to help their own trade and industry then they must allow economic independence and competition, and they need to put an end to deception and fraud. They should start using gold and silver as money, and they should reject the U.S. paper dollars that they receive in trade with the U.S, and demand gold and silver as payment, instead. They should reject the frauds of fractional reserve banking and should refuse paper money. If they do this, they will stop being economically demoralized in trade relations with the U.S., and this will lead them to thrive.
The deal will give foreign firms new access to the fields of insurance, telecommunications and banking, including auto finance.
That should boost foreign investment in China and speed up the process of economic reform.
In the past, employees could not compete in a free market and lose their jobs.
Nowadays internet jobs have been constructive, but in particular industries some people have taken on permanent irreplaceable losses. People are also now more in favour of opening their own businesses rather than working for organizations.
Customers benefit in the domestic economy as they can now gain a better range of goods and services.
The increased competitions ensure goods and services, as well as inputs, are supplied at the lowest prices.
To claim that “globalisation has raised living standards all over the world” is probably legitimate provided that we understand that it has also, and more notably, lowered living standards too. The rich have got richer and the poor have been dispossessed, hundreds of millions of people living on the edge of the market economy, selling a small surplus after filling the needs of their families without entering the market, have been pushed off their land or out of their forests and traditional pastures.
The problem with free trade is that Free trade means competition, and competition can be risky, particularly when it affects a country’s prosperity. Countries often want to protect themselves against the effects of free trade. They can make foreign goods more expensive by imposing taxes (‘import tariffs’) on them, which means that consumers have to pay more for them. This protects the people in their own country who produce those goods, because they do not have to compete against cheaper foreign imports.
In practice, trade has never been free, because some countries have taken steps to protect themselves. However, as we shall see below, trade is freer for some countries than it is for others.
India has one of the fastest growth rate globally and the global economy which has helped GDP growth rates. In 2002-03 droughts in the last two decades in India has slowed the process of growth whereas in 2007 there was a slight increase in growth. A global comparison shows that india is now one of the fastest growing countries just after china.
As India and china are two of the poorest countries around the globe the takes advantage of this so they can produce products for the U.S.