Money and Uncertainty in the Philippines: A Friedmanite Perspective

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Money and Uncertainty in the Philippines A
Friedmanite Perspective

• A. Baunto, C. Bordes, S. Maveyraud-Tricoire and
  P. Rous

• Safety and efficiency of the financial system
• August 27th 2007
• Manila, Philippines

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Organisation of the paper

• Friedmans proposals
• Stylised facts
• Money variability and income velocity of money
• Inflation, uncertainty and output growth
• Conclusion

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Friedmans proposals

• Money Supply Volatility Hypothesis An
  exceptional volatility of monetary growth
  increases the degree of perceive uncertainty and
  thereby increases the demand for money
  Friedman, 1984 and
• Inflation Variability and Growth Hypothesis
  Inflation, particularly highly variable
  inflation, interferes with growth by (a)
  introducing static into the messages transmitted
  by the price system, increasing the uncertainty
  facing individuals and business enterprises,
  which encourages them to divert attention from
  productive to protective activities, and (b)
  inducing governments to adopt such
  counterproductive false cures as price controls
  and incomes policy. These adverse effects have
  sometimes been more than offset by other forces,
  so that high inflation has not prevented rapid
  growth. Friedman, 1980, pp. 55-6

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Money variability and income velocity of money

• Framework of analysis
• Previous literature
• Friedman, 1983, 1984 Hall and Noble, 1987
  Brocato and Smith, 1989 Mehra, 1987, 1989
  Thornton and Molyneux, 1995 McMillin, 1991
  Chowdhury and Wheeler, 1999 Chowdhury, 1988
  Lynch and Ewing, 1995 McCornac, 1994
  Baliamoune-Lutz and Haughton, 2004 Choong, et.
  al. 2004 Bordes, 1990 Thornton, 1995 Payne,
  1992 Arize, 1993 Thornton, 1991 Serletis and
  Shahmoradi, 2005

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Money variability and income velocity of money
Figure 1. M1 growth rate and Income velocity
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Money variability and income velocity of money

• Methodology
• Use of Bai-Perron (2003) technique to
  endogenously determine multiple structural breaks
  in M1 velocity
• Use of GARCH model

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Money variability and income velocity of money
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Money variability and income velocity of money

• Results

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Money variability and income velocity of money
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Money variability and income velocity of money
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Money variability and income velocity of money
Figure 2. Conditional variability of M1 growth
and income velocity (log, detrended)
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Money variability and income velocity of money
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Money variability and income velocity of money
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Inflation, uncertainty and output growth

• Framework of analysis
• with

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Inflation, uncertainty and output growth

• Previous literature
• three surrounding issues
• Link between high inflation rates and variability
  of inflation
• (Davis and Kanago, 2000 Fountas, 2001 Fountas
  et al., 2002 Grier et al., 2004 Aspergis, 2004
  Kontonikas, 2004 and Thornton, 2006)
• Link between uncertainty and money growth
• (Grier and Perry (2000), Hayford (2000), Fountas
  et al. (2002), Aspergis (2004) and Grier et al.
  (2004))
• Link between the level and the variability of
  both inflation and growth
• (Wilson and Culver, 1999 Grier et al., 2004
  Wilson, 2006 and Fountas and Karanasos, 2007)
• Mixed results but better when GARCH models are
  used

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Inflation, uncertainty and output growth

• Methodology
• Use of filters to decompose real GDP so that
• Use of Threshold GARCH model
• Use of pseudo-bootstrap to increase robustness

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Inflation, uncertainty and output growth

• Results

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Conclusion

• strong evidence in favor of Friedmans proposals
  on uncertainties in money supply and inflation,
  and economic growth
• high variability of money growth is linked with a
  diminution in the income velocity of narrow
  definitions of money
• high level of inflation Granger causes a higher
  variability of inflation, which, to a certain
  extent, Granger causes a diminution of the
  potential output.