Monetarism and Growth
Monetarism is NOT the same thing as Monetary Policy from the Fed
Quantity Theory of Money (M x V = P x Y) or M x V = P x Q
(Money, Velocity, Price, GDP Output, Quantity)
Monetarist’s belief that Money Velocity is Stable in the Short Run
Rule of 70: Number of years for variable to double = ____70____
Annual Growth Rate of the Variable
Growth in Productivity
Labor Productivity
Human Capital
Physical Capital
Technology Development
Natural Resources Development
Dollarization
The term was invented to describe the move by some countries to officially declare that they would use the US
dollar as their own domestic trade currency. They would simply abandon their old currency and trade in
dollars.
Recently, the term "dollarization" has been used by economists to describe the move by any country to use the
currency of some other country. An example might be a country abandoning its domestic currency for the Euro.
Countries listed as "officially" Dollarizing to the US Dollar
(as of 2005):
British Virgin Islands
East Timor (keeping local coins)
Ecuador (keeping local coins)
El Salvador
Marshall Islands
The Federated States of Micronesia
Palau
Panama (keeping local coins)
Pitcairn Island
Turk and Caicos Island
Why Dollarize?
Currency stability
Draw for investors
No money flight or attacks on currency values
Risks of Dollarization?
Loss of domestic profits
Loss of domestic monetary policy options
Reduction of central bank "lender of last resort" options
Reliance on US Monetary and Currency Policies
Access to holdings of US dollars
US policy decisions that help the US but hurt the other country
Basic Formulas: AP Macroeconomics
GDP (expenditure approach): C + Ig + G + Xn
(income approach: W + R + I + P + SA)
NI = NDP –Indirect business taxes
+ American income earned abroad
- Foreign income earned in US
( = “net foreign factor income”)
or
NI = NDP – statistical discrepancy,
+ net foreign factor income
NDP = GDP – CFC (consumption of fixed capital)
(depreciation)
PI = NI – Taxes on production and imports,
- social security contributions,
- corporate income tax,
- undistributed corporate profits,
+ transfer payments
DI = PI – Personal Income Tax
+ Credit Card Expenditures above income
CPI: Price of market basket
Price of index year basket x100
GDP deflator/real GDP: Nominal GDP
Price index
x100
C = DI – Savings
- Credit Card Interest Payments
CPI (also): Current yr. index – prev. yr. index
previous yr. index
x100
GDP Price Index:
Price of GDP goods and services in select. yr.
Price of GDP goods and services in base yr.
Okun’s Law for GDP Gap: 1 to 2 % ratio of
excess unemployment leading to lost GDP
Doubling Rate/Rule of 70/72
70/72
-or70/72_________
Inflation %
Interest Rate collected
Real Income Measure: Nominal income
Price index (in .00)
Real Interest Rate:
Nominal Interest rate –actual inflation rate
APC: Consumption
Income
MPC: Change in consumption
Change in income
Aggregate Expenditures/Domestic Output
Assumption: GDP = C + Ig
GDP Multiplier: Change in real GDP
Initial change in spending
Ricardian Equivalence Theorem:
Public budget deficit creates greater private saving
M 2: M 1 + non-checkable savings + “small”
time deposits (< $100,000)
Price Value of the Dollar: _____1_________
Price level (in .00)
Reserve Ratio of Deposits: Required Reserves
Demand –Deposit Liabilities
Monetary Multiplier:
1____________
required reserve ratio ( R )
Unemployment Rate: Unemployment #
Labor Force #
x100
Inflation Rate: Current CPI -Index CPI
Index CPI
x100
Per Unit Production Cost: Total input cost
Units of output
Inflation Premium (for lenders):
Interest rate + anticipated inflation %
Nominal Interest Rate:
% increase in money the lender receives
APS: Savings
Income
APC + APS = 1
MPS: Change in savings
Change in income
MPC + MPS = 1
Leakages and Injections Assumption:
S = Ig
Marginal Analysis Multiplier: _1__
-or- __1_
MPS
1-MPC
M 1: Currency + Demand Deposits (checkable)
M 3: M 2 + “large” time deposits
(> $100,000)
Interest Yield on Bonds: Annual Interest %
Bond Selling Price
Excess Reserves: Actual Reserves –Required Res.
Monetarist Equation of Exchange: MV = PQ