Week 6 Discussion Responses for Econ and Analytics

Week 6 Discussion Responses - Evidence of Monetarism – Econ

Discussion Response 1

By: S,N

Review and compare the trends in money supplies/ aggregates to the trend in the CPI over several decades.

I chose to look at the Consumer Price Index for All Urban Consumers All Items. This “is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers.”(U.S. Bureau of Labor Statistics, 2017). This index show 88 percent of the total population, accounting for workers, unemployed, retirees, and those not in the labor force. The “CPIs are based on prices for food, clothing, shelter, and fuels; transportation fares; service fees (e.g., water and sewer service); and sales taxes.” (U.S. Bureau of Labor Statistics, 2017). Looking at a chart spanning from 1950 to 2015, the first thing I notice is the large upswing around 1985. In January 1950, the CPI was 23.51 and in January 1975, the CPI increased to 52.30. In just ten years, the CPI doubled increasing to 105.70. This trend of large increases by more than 50 percent continued each following decade. As of January 2017, the CSI is now at 244.16.

This same trend of a large increase in 1985 is noted in M2 as well. “M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus savings deposits (which include money market deposit accounts, small-denomination time deposits (time deposits in amounts of less than $100,000); and balances in retail money market mutual funds” (U.S. Bureau of Labor Statistics, 2017). In January 1975 the M2 Money Stock was at 906.3. In ten years it increased to 2,332.4. As of July 2017, the M2 Money stock is at 13,525.3. The increase in M2 Money Stock coincides with the same increase in CPI.

State your opinion about the validity of Monetarism (Friedman's famous quote that inflation is everywhere and always a monetary phenomenon).

The Monetarism view of the fiscal policy is that the aggregate demand will not be affected by the velocity of money changes as they anticipate the velocity of money to remain unchanged. The Monetarist view of the monetary policy is that a change in the money supply must alter total spending because the velocity of money is stable.

My view is more of the Keynesian view than the Monetarist view. The velocity of money has to change. The monetarism view seems to be too finite as with the Keynesian view the aggregate demand, prices, real output, interest rates may or may not be affected by a change in the money supply. I feel that you cannot be certain exactly what is going to happen when the money supply changes.

Has Monetarism been an effective tool for conducting monetary policy?

“How well monetary policy works depends on how stale or predictable the velocity of money change is” (Schiller, 2013). This statement shows that if monetarism is correct, then we should do well at predicting the monetary policy. Looking at the chart in Schiller regarding the velocity of M2, it is anything but constant and sable over that past few decades, so following a monetarist view seems inaccurate.

What role does monetarism have in current monetary policy?

Monetarist advice on monetary policy is that they favor fixed money supply targets. They believe the velocity of money change is unpredictable in the short term, but stable when looking in the long run. They believe the Fed should focus on the money supply and increase it by a fixed amount and then its banking powers to achieve the money growth target in place.

References

Bureau of Labor Satistics. (June, 2017) Consumer Price Index. Retrieved from http://www.bls.gov/cpi/

Schiller, B & Hill, C. (2013). The Macro Economy Today (13th ed.).  New York, New York:         McGraw-Hill Companies, Inc.

U.S. Bureau of Labor Statistics (July, 2017) Consumer Price Index for All Urban Consumers: All Items. FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCSL  

Discussion Response 2

By: G,Z

Money supply,(M2), is the sum of cash held by public,  balances and transaction accounts,  and balances in most savings account and money market mutual funds.  Consumer price index is a measure of changes in the average price of consumer goods and services. Inflation rate is the annual percentage rate of increase in the average price level. The government  started reporting consumer price index in 1913. Looking back at the data related, one can notice that there was a slow but steady increase in CPI from  21 in 1947 to  34 in 1967,  with average annual growth rate of 0.65. The CPI  continued to grow after 1967 but with a greater annual rate of growth of about 4.18. During the last few decades, CPI, spiked more than several times the latest were in 1980 and 2009. Comparing the graph of CPI and money supply over the last few decade, we can notice how both are growing at almost same rate until the last decade, when the velocity of M2 slowed down but with continued growth. The M2 as of June 2017 reached a high of $13,525 billion. Looking at both graphs of CPI  and money supply, it is obvious how the trend is matching in both graphs. 

 Monetary policy is the use of money and credit controls to influence macroeconomic outcomes. I agree with friedman's famous quote that inflation is everywhere and always a monetary phenomenon. This can be used by Feds to monitor and interfere when needed in the macroeconomy through its tools. 

Monetarism played a big role in the recent big recession, when the Fed used its tools to help recovery. It lowered the discount rates at which it is lending money to banks and increased the banks' reserve requirement. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. That said,  Friedman argued that the poor monetary policy of the federal reserve was the primary cause of the Great Depression in the U.S. not  problems within the savings and banking system. 

 According to Friedman and other monetarist, the role of central bank should be  to limit or expand the money supply in the economy. Friedman proposed that the central bank set targets for the inflation rates. 

References

Bureau of Labor Satistics. (June, 2017) Consumer Price Index. Retrieved from http://www.bls.gov/cpi/

Schiller, B & Hill, C. (2013). The Macro Economy Today (13th ed.).  New York, New York: McGraw-Hill Companies, Inc.