Economic stimulation and monetization coefficients

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The slowdown of economic growth in the U.S., China and Japan, the recession in the eurozone countries, analysts are increasingly talking about the need for further stimulating the national economies of the world's leading states. As possible options for easing monetary policy are considered the reduction of key interest rates and standards of deductions to the required reserves funds, as well as increasing the liquidity of the banking system through open market operations.

LTRO is the last option

Unfortunately, most central banks are limited in their ability to further decreases interest rates and reserve ratios, as these indicators are at historically minimal levels. Only the last instrument remains, but the experience of the European Central Bank shows that "pumping money into the economy"The failure of the programs to provide the region's banking system with 3-year loans is forcing us to look for new methods of financing the weakening economy. The failure of programs to provide the region's banking system with 3-year loans makes it necessary to look for new methods of financing the weakening economy. Now the mass purchase of debt securities through the regulator itself in the secondary market and with the help of the stabilization fund (ESM) at auctions for the placement of bonds and bills is being considered.

The main deterrent is considered to be risk of inflation as a result of implementation of this program, which contradicts the objectives of ECB activity. Besides, the duration of the process of coordinating the actions of the regulator and the stabilization fund puts a certain pressure on the market.

In my opinion, a much more interesting question is how effective the program under consideration will be and whether its implementation will really lead to an acceleration of inflation. The study of the dynamics and the current state of monetization coefficients will help to answer this question.

Monetization coefficients and regions of the world

These indicators reflect the share of the country's commodity turnover serviced by money and are expressed using the following formula:

                          M

      K = ————————-,

                         GDP

where M is the money supply aggregate. As a rule, it is understood as M2 ("quasi-money"), an indicator that includes cash, demand deposits, term and savings bank accounts, as well as the most liquid financial instruments circulating in the market, according to the IMF methodology.

Exploring monetization rates The largest economies, accounting for more than 60% of the world's total GDP, one can come to some rather interesting conclusions.

Monetization coefficients in selected countries of the world, %

As can be seen from the table, money in the European, Chinese and Japanese economies is enough to provide them with the existing commodity turnover. That is why, after the conduct of the LTRO the ECB's balance sheet increased sharply, and after a while many banks began to return the liquidity received during the auctions.

In this regard, some regulators are also limited in their ability to intensify open market operations. The Federal Reserve, which can afford to QE3. And it is likely that this program will once again prove effective.

Inflation risk

The question remains, will the stimulus lead to an increase in inflation? From a theoretical point of view, the answer is obvious: more money supply leads to higher prices. In practice, however, one year after the last round of quantitative easing, implemented in the fall of 2010, level Inflation in the U.S. began to fall.

At the same time and monetization factor of the U.S. economy also declined from 89.2% in 2009 to 83% last year (by 7.5%). That is, the money supply in the States is growing slower than GDP, indicating an increase in the velocity of money.

Thus, the resources of many central banks to stimulate national economies are limited by the possibility that quantitative easing measures may not be effective. The solution to existing problems should be sought through other methods, primarily fiscal policy. Diversifying taxation and optimizing government budgets could be the key to recovery.