Macro-financial developments of Macro-financial developments of Slovakia: an empirical analysis based on Slovakia: an empirical analysis based on

the monetary circuit theorythe monetary circuit theory

International Conference “National and Regional International Conference “National and Regional Economics VII”Economics VII”

  

October, 1-3, 2008October, 1-3, 2008University of KoUniversity of Košicešice, Slovakia, Slovakia

Matthieu Llorca Matthieu Llorca University of Burgundy, L.E.G/FARGO-CEMF University of Burgundy, L.E.G/FARGO-CEMF

1. Introduction1. Introduction

Economic success of Slovakia:Economic success of Slovakia:01/01/2009 New Member of Euro Area and the first country 01/01/2009 New Member of Euro Area and the first country

of the Viségrad Groupof the Viségrad Group

Theoretical framework used: heterodox analysis, i.e Theoretical framework used: heterodox analysis, i.e the the monetary circuit theorymonetary circuit theory

Is the monetary circuit theory relevant to explain Is the monetary circuit theory relevant to explain macro-financial develoments over the last decade in macro-financial develoments over the last decade in Slovakia? Slovakia?

We focus on two elements of the monetary We focus on two elements of the monetary circuit theory:circuit theory:

- The Keynes-Kalecki identity- The nature endogenous of money

Organization of the paper:1. Characteristics of the monetary circuit theory2. Descriptive analysis of the macro-financial development

in Slovakia3. Econometrics findings

2. Theoretical framework: the monetary 2. Theoretical framework: the monetary circuit theory (MCT)circuit theory (MCT)

2.1 Theoretical roots2.1 Theoretical roots::- Wicksell (1898)Wicksell (1898)- Keynes (1929, 1936 and 1937)Keynes (1929, 1936 and 1937)- Kalecki (1933, 1938 and 1954)Kalecki (1933, 1938 and 1954)- Sylos-Labini (1948)Sylos-Labini (1948)- Schumpeter (1953)Schumpeter (1953)- Joan Robinson (1956)Joan Robinson (1956)

2.2 Theoretical development of the MCT: 2.2 Theoretical development of the MCT: 60s-70s decade60s-70s decade French school (Le Bourva 1962, Barrère 1973, Parguez 1975, 80, French school (Le Bourva 1962, Barrère 1973, Parguez 1975, 80,

84 and 96, Schmitt 1966, 71, 75 and 84) 84 and 96, Schmitt 1966, 71, 75 and 84) Italian school (Graziani 1984, 85, 89 and 90, Messori 1985, Italian school (Graziani 1984, 85, 89 and 90, Messori 1985,

Bellofiore, 1985)Bellofiore, 1985) Postkeynesian (Rochon, Lavoie, Seccareccia…..)Postkeynesian (Rochon, Lavoie, Seccareccia…..)

2.3 Characteristics of the MCT2.3 Characteristics of the MCTMonetaryMonetary theory of production: credit, money and theory of production: credit, money and production theoryproduction theoryProfit and repartition theoryProfit and repartition theorySequential dynamic approach (sequential historical time, Sequential dynamic approach (sequential historical time, Robinson, 1980); Uncertainty (Davidson)Robinson, 1980); Uncertainty (Davidson)Hierarchical relationship between the six economic Hierarchical relationship between the six economic agents (firms, commercial banks, central bank, agents (firms, commercial banks, central bank, households, government and rest of the world)households, government and rest of the world)

We focus on two MCT pillars among others:We focus on two MCT pillars among others:- nature endogenous of money (2.3.1)- nature endogenous of money (2.3.1)- the Keynes-Kalecki identity (2.3.2)- the Keynes-Kalecki identity (2.3.2)

2.3.1 Endogenous nature of money2.3.1 Endogenous nature of money

- Money is created ex nihilo by commercial banks (Aglietta, 1979)

- Credit i.e Keynes finance motive- Production makes the endogenous nature of money- Credits makes deposits-When the loans are repaid, deposits are destroyed

Theoretical debates about endogenous money (Pollin, 1991):

- Accommodationist view (Moore, 1989)- Structuralist view (Palley 1996, 98)- Liquidity preference view (Howells 1995)

Accom. view Structralist view Liquidity Pref. View

Money supply is determined by the

demand for bank loans

Loans create deposits

Central bank must and always accommodate

bank demand for reserves and currency

The monetary authority is only able to control

interest rates but not the supply of reserves

The money supply function is perfectly interest rate elastic

The central bank does not fully accommodate reserves demand by commercial banks

the central bank retains some control over the

supply of reserves (targeting monetary base

or interest rates)

there is no independent demand function money

economic units have different liquidity

preferences about the amount of money they

wish to hold

SO credit money can be in excess supply

if the supply of deposits is insufficient to match the demand for loans, individual preferences

will change relative interest rates, thereby raising the supply of

deposits and reducing the demand for loans

Endogenous money in MCTEndogenous money in MCT: horizontalist view i.e: horizontalist view i.ecentral bank has an central bank has an accomodationnist role accomodationnist role and must fix and must fix nominal interest rates (Arestis, 1996)nominal interest rates (Arestis, 1996)

2.3.2 Saving-investment identity: Keynes-Kalecki identityStructural relationship formulated by Keynes (1935) and Kalecki (1936, chap. 6 and 7 of the TG)5 sectors:

- Firms - Households- Banks- Government- Rest of the world

(Se – Ie) + (Sf – If) = (Sg – Ig) + (Sm – Im) + (Sb – Ib)

if an economic sector has a net lending financial if an economic sector has a net lending financial position, another sector will have a net borrowing position, another sector will have a net borrowing financial positionfinancial position

The hierarchy between the different sector in the circuit The hierarchy between the different sector in the circuit explains the causality inside the Keynes-Kalecki identity explains the causality inside the Keynes-Kalecki identity running from the right side of the identity (i.e budget running from the right side of the identity (i.e budget deficit, private consumption and bank profits) to the left deficit, private consumption and bank profits) to the left side: namely firms profits and current account side: namely firms profits and current account

3. Macro-financial developments of 3. Macro-financial developments of Slovakia: descriptive analysisSlovakia: descriptive analysis

Overview of Slovakian main economic indicators

Read GDP

Inflation rate

Short-term Nominal Interest rate

Budget balance

Public debt

1996-2007 5,05 6,39 8,33 -5,36 37,83 1996-2000 3,38 8,22 15,11 -6,68 36,4 2001-2004 4,55 6,65 6,6 -5,22 44,15 2005-2007 8,5 3 3,86 -2,9 32,3 Source : Eurostat

Financial position of institutional sectors in Slovaquia

Non-financial

corporations

Financial corporations

Government Households Foreign sector

1995 130,71 328,27 -510,87 363,9 -312 1996 -1383,68 -176,17 -1648,93 1545,82 1662,95 1997 -1729,76 105,71 -1186,45 1018,66 1791,83 1998 -1580,8 50,35 -1060,35 694,32 1896,48 1999 98,54 122,63 -1362,46 417,04 724,25 2000 1733,09 184,12 -2692,64 180,72 594,71 2001 -509,01 288,73 -1526,37 53,6 1693,05 2002 -617,79 516,98 -2123,27 -223,01 2447,09 2003 -1118,42 273,78 -809,13 -296,27 1950,03 2004 -1092,17 116,11 -815,75 -399,06 2190,87 2005 -2266,98 352,21 -1078,53 -421,15 3414,44

Notes: (-) Corresponds to a net borrowing position; (+) corresponds to a net lending position Source: Eurostat

Monetary process of creation (in percentage)

Slovakia Money

commercial bank

Money Central bank

2000 94,34 5,65 2001 95,33 4,66 2002 37,35 62,64 2003 72,17 27,82 2004 143,10 -43,10 2005 86,63 13,36

Source: author calculations

4. Econometrics findings

Quarterly data extracted from National Quarterly data extracted from National Bank of Slovakia (2002/1 to 2007/4)Bank of Slovakia (2002/1 to 2007/4)

Empirical hypotheses of the three approaches on endogenous money supply

Accommodationist

(Moore, 1989)

Structuralist

(Palley, 1996, 1998; Pollin

1991)

Liquidity preference

(Howells, 1995)

LL → LM3, Lb LL ↔ Lb, Lm LL ↔ LM3

Notes: LL is log-level of total commercial bank loans; Lb log-level of monetary base; LM3 is log-level of the M3 money supply; Lm is log-level of the M3 money multiplier.

Time-series Unit Root Tests

Augmented Dickey-Fuller (ADF)

Phillips-Perron (PP)

LOANS

T & I (2) -5.26**

T & I (3) -5.37

(LOANS)

T&I (6) -4.97**

N(2) -5.07**

MONETARY BASE

(Lb)

T & I (0) -5.45** N (5) -8.91 **

MONEY MULTIPLIER

(Lm)

T & I (0) -3.18 N (5) -3.20

M3

T & I (0) -0.96 N (5) -1.17

(M3)

T&I (6) -6.19** T&I (3) -6.40**

Stationnary findings

Variables Order of integration

Loans (LL)

I(1)

monetary base

(LB)

I(0)

Money

multiplier (Lm)

I(0)

M3 (LM3)

I(1)

Table 7. Granger causality tests L = 6 L = 4 L = 2 DLL→LB LB→DLL DLL→Lm Lm→DLL DLL→DM3 DM3→DLL

1,62 (0,26) 2,57 (0,12) 2,81 (0,10) 2,34 (0,14) 1,13 (0,43) 0,85 (0,56)

2,27 (0,11) 2,26 (0,16) 4,02 (0,02*) 1,62 (0,22) 0,95 (0,46) 0,70 (0,66)

5,76 (0,01*) 1,53 (0,24) 4,97 (0,01*) 2,18 (0,14) 2,99 (0,03*) 0,21 (0,80)

Notes. L = The number of optimal lag based on Akaike criteria.

Causality detected

Slovakia

LL→LB LB→LL

Yes No

LL→Lm Lm→LL

Yes No

LL→LM3 LM3→LL

Yes No