Our total monetary economy is practically a complete fiat (artificial) system, which ignores the biological and physical limits of the human economy. Exponential finance is becoming an economic reality and uncertainty reinforces systems entropy. The rules of the game are changing exponentially.

Stephen is correct. A few additional things might be worthy of consideration.

Since the Great Recession, banks in the US have been reluctant to keep their excess reserves close to zero as many did before.

Until recently, aggregate demand has not been especially robust. Moreover, we have observed relatively little wage and salary pressure in the United States.

Some intriguing research out of the Federal Reserve Bank of St Louis, may suggest that low Central Bank rates are consistent with lower rates of inflation. Essentially, we may have had it partially backwards before thinking that the Federal Reserve in responding to inflation with higher interest rates. This summary is to brief; one should read the research to get it's full flavor.

Dear Pedro

A textbook explaination is that increase in money supply will cause inflation if the the economy is at full employment and full production. Keynesians think that the economy determines the real interest rate and not the monetary authorities, and they think that the real interest rate is not yet achieved. Some people think that we can manage the economy by targeting certain variables such as the money supply and the interest rate, which makes other things go unstable. Then there are policy problems like inconsistencies. Let me also throw in the possibility of liquidity holdings by institutions and individuals. So, is macroeconomic predictions hard to make? I am reminded of Thomas J. Sargent book on "The Conquest of American Inflation", which uses drifting parameters to reconcile theory and policy.

Dearest Mr. Ternyik, Mr. Catlett and Mr. Ramrattan

First of all, thank you very much for your appreciated answers, which I share. In the first place, in a crisis economic context especially between 2009-2012 the proactive action of central banks, in my opinion, has caused the cause and effect of monetary policy has not adjusted to the orthodoxy of economic theory.

I believe that there have been two factors, and I would like to consider your opinion, those that have prevented inflation from increasing notably in the context of low rates and expansion of the monetary mass.

First, we can define it as sensitivity to risk, uncertainty or lack of confidence in the future of the economy, which in practice meant that "even though real rates are negative, I dare to invest".

Second, one of the characteristics of the current economy is an excess of supply. This overproduction and excess installed capacity has depressed and contained prices.

With regards

PM

Consider the original question, "In relation to the expansive monetary policy that has happened during the last years, according to the economic theory, an expansion of the monetary mass and a decrease in interest rates should have caused a notable increase in inflation, a circumstance that has not happened. Can you tell me reasons or ideas so it has not been like that?"

One presumes that the 'economic theory' referred to is a quantity theory (QT) of money (causing prices) theory. Yet, even the most basic quantity theory allows for variable velocity (if not, the quantity theory is a quantity identity, hence not a theory at all). In simple versions of the QT velocity is inversely related to the nominal interest rate. This because the opportunity cost of holding money is the nominal interest rate. Thus, as nominal interest rates fell starting in late 2008, the velocity of money would be expected to fall. Ceteris paribus, this would be deflationary. Central banks then increased the monetary base dramatically in order to offset this deflationary effect. At best, central banks were able to keep the inflation rate from going negative (not all places at all times). So, I am not certain that the QT (as outlined here) was refuted. Though, I do concede that my explanation relies on the "drifting parameters", in this case declining monetary velocity (and in this period rising excess-reserve-to-deposit and currency-to-deposit ratios). But, while apparently 'drifting', the QT does have an explanation for, why these parameters should change as they did. And, thus, why inflation did not explode as a naive QT (fixed or constant velocity) would have indicated.

OOPs, need to edit the above: "...the QT velocity is inversely related to the nominal interest rate."

Of course it is the demand for nominal money balances that is inversely related to nominal interest rates.

So my wording should be changed to:

"...the QT velocity is positively related to the nominal interest rate."

Then, I think the rest follows.

Thanks--sorry for the confusion.

Dear Dr. Martinez Villar,

I think you have touched upon a very important question which after the momentous historical changes (structural changes) that have taken place in the world like for e.g. US quantitative easing, or Brexit or the emergence of the entire new classification of political economy in terms of "emerging market countries" or BRICS. The problem is at least in the Third World that as someone said "the world if flat - with rounded edges" (italics added) that these momentous events will probably become endogenised in our day to day living a century later. But definitely due to the market microstructure method of "bounded rational expectations" (Mallick et. al.) there will be slow but exponential smoothing and Mallick-Hamburger-Mallick (2016, 2017, 2018) stock and flow in functor algebra calculus thereby altering the Navier-Stokes like flow and proving it in specific applications (our solution to the Millenium Prize problems with AGGNNetworks - that is a Gauss-Markov development of DataScience Computer Econophysics). This will result in Econophysical resultant method of shifts of demand curves as well as along demand curves converting exponential smoothing into DGE paths. The path-integrals are hard to compute harder to forecast but we have proved that they will exist by laws of efficiency and axioms of "genetic quality" and "arrow of time". So we can hope for change in market equilibria and discover new scientific methods to deal with the string matching fields thereby coming into existence in cybernetic spaces. Why is this different from usual econometrics of development ? Because, the maths requires the statistics and vice versa, it is mathematical quantum science necessarily requiring cybernetic spacextime i.e, dynamic data panels and Gauss-Markov procedures and therefore all the Millenium Mathematics problems in specific applications (functor algebra calculus). We are lucky computers were invented before !

Soumitra Kumar Mallick

for RHMHM School

Dear RG colleagues David and Soumitra

Thank you very much for your responses, which I find interesting.

With regards

Dear Pedro,

I think that you could take into account also that the relation between money supply and inflation is not direct. It goes through certain transmitting mechanisms. When these mechanisms are broken entirely or partially there will not be such a relationship. Central banks may increase the supply of money but in case this doesn't translate into more credit and higher wages there will not be pressure on prices.

Dear Pedro,

I think that you could take into account also that the relation between money supply and inflation is not direct. It goes through certain transmitting mechanisms. When these mechanisms are broken entirely or partially there will not be such a relationship. Central banks may increase the supply of money but in case this doesn't translate into more credit and higher wages there will not be pressure on prices.

Dear Stephen,

Your findings are quite exact for the Albanian economic reality. The lack of transmission effect can be attested with these indicators: The decrease of the basic interest rate was not accompanied with the increase of the inflation. The main reasons why is so are two: first, the index of the valuation of the Albanian economy precisely 49,5%. (The authors of this research for the calculus of this index have taken into account 15 indicators related to GDP, Credits, Deposits, etc.)The second main reason is that the Albanian economy is main based on importation thus it is considered as a consumer economy. So the main hypothesis of our research is that the effect of monetary transmission policy is unimportant. The authors of this research (in Albanian language) have tested this hypothesis.

Best regards,

Prof. A. Naqellari

Dear Stephen,

Your findings are quite exact for the Albanian economic reality. The lack of transmission effect can be attested with these indicators: The decrease of the basic interest rate was not accompanied with the increase of the inflation. The main reasons why is so are two: first, the index of the valuation of the Albanian economy precisely 49,5%. (The authors of this research for the calculus of this index have taken into account 15 indicators related to GDP, Credits, Deposits, etc.)The second main reason is that the Albanian economy is main based on importation thus it is considered as a consumer economy. So the main hypothesis of our research is that the effect of monetary transmission policy is unimportant. The authors of this research (in Albanian language) have tested this hypothesis.

Best regards,

Prof. A. Naqellari

Thank you everyone for your kind help and answers. All responses add value and are interesting points of view on the question posed.

There could be crowding out effect of monetary policy and fiscal policy

Dear Colleagues and Friends from RG,

The above question inspired me to propose reflections and inspire discussions on the following issues:

The role of monetary policy of central banking in the context of financial system security.

On the basis of the above considerations and conclusions drawn from the discussion on interesting issues discussed, I formulated the following thesis that the impact of central banking monetary policy on shaping the security of the financial system may be particularly significant. Below I have described the key determinants confirming the formulated research thesis. To the above discussion, I would like to add the following conclusion formulated as a summary of my previous considerations on this topic: the impact of central banking monetary policy on shaping the security of the financial system. The above discussion inspired me to formulate the following question:

What can be the impact of monetary policy of central banking on shaping the security of the financial system?

Monetary policy shaped by central banks has a particularly significant impact on the lending policies of commercial banks, including the classic deposit-lending banking model and investment banks operating, among others, on the credit and interbank loan markets. Central banks, in order to control the level of systemic credit risk, influence through monetary policy instruments the lending activity of commercial banks, the revival of lending at banks in the situation of recession in the national economy, and enforce a reduction in the scale of loans granted to various types of business entities and the population when the bank the central states that the level of business credit and consumption is too high and the repayment of loans is carried out by borrowers with increasing delays and when the quality of loan portfolios in commercial banks decreases. However, over the past several decades, financial systems have changed significantly, the role of central banks has increased, currency and derivative markets have developed particularly dynamically.

In connection with the development of economic globalization in international financial systems, the increase in the scale of mergers and acquisitions in the field of capital transactions in the financial sector, which leads to the emergence of larger and larger banks operating globally, in addition to deregulation in financial markets, the growing importance of monetary policy in the context of interventionist economic policy, the development of international liquid exchange rate systems on currency markets, the development of derivatives used not only to hedge other financial transactions but also to speculative activities on capital markets, etc. since the 1970s, systemic credit risk has been increasing and the frequency and scale of domestic and supranational occurrences financial and economic crises. In connection with the increase in systemic credit risk, the importance of effective operation of financial supervision institutions and improvement of the credit risk management process is increasing.

In the 1990s, serious mistakes were made in allowing investment banking to be combined with the classic deposit and credit banking system in the Anglo-Saxon financial system, thus lifting restrictions and instruments ensuring a high level of system security in commercially operating financial systems. These types of erroneous changes in prudential regulations that reduce the scope of effective operation of financial supervision institutions and credit risk management systems increase the likelihood and scale of negative effects of subsequent financial and economic crises. To this should be added the serious mistakes that were made in shaping monetary policy and allowing for a rapid increase in public debt in public finances even before the global financial crisis emerged in autumn 2008. In the context of these facts and the increase in systemic credit risk, there are considerations whose main purpose is to verify the research thesis on the question of the possible excessive growth of the commercially operating financial system in modern economies and on an international scale, far above the needs and macroeconomic conditions of currently functioning national economies. Therefore, in order to verify this type of theses, one should consider the answer to the following question: Is the over-expanded commercially operating financial system operating more and more speculative on financial markets, including not only credit but also securities, derivatives and currency markets, speculative investments in raw materials, etc. in modern national economies and on a global scale may displace classically implemented investments involving the implementation of investment projects leading to the creation of real, direct, sustainable, investment financial economic goods by enterprises (financed from non-bank financial sources) and by the state (investments financed from public funds, with particular emphasis on national economies with their own national currency)?

The process of improving credit risk management is implemented mainly at the level of a specific commercial bank. Central and supervisory institutions, which mainly include central banking and banking supervision institutions, may affect some aspects of this process, correct possible excessive levels of systemic credit risk, especially in a situation where a specific bank unreliably implements prudential procedures in the field of lending activity or in a deteriorating situation loan portfolio quality caused by the recession in the domestic and possibly global economy. Before the emergence of the global financial crisis in autumn 2008, there was an unwritten rule in some financial environments that a large banking entity could not fail. The declaration of bankruptcy by one of the largest investment banks, Lehman Brothers, whose bankruptcy began with the global financial crisis, questioned this type of opinion regarding financial system entities.

To analyze the correlation of the effectiveness of the process of improving the credit risk management process in commercial banks and the shaping of monetary policy by the central bank, the key issue is the relationship between central banking and commercial banking that has been built over the years. For example, the issue of implementing central bank assistance functions for commercial banks in the event of a significant increase in liquidity and debt risk, problems with the effective management of assets and liabilities and / or in the case of high risk of bankruptcy. In such a situation, a commercial bank may ask the central bank for help in the form of low-interest loans, interest-bearing loans on preferential terms, while increasing the scope of financial management control. In addition, the possibility of buying commercial junk securities and other assets and outstanding loans from banks. This type of central banking assistance activity towards commercial banks, including investment banks, has been used on a large scale since September 2008, i.e. since the beginning of the development of the largest global economic crisis in the history of global financial crisis. However, it is possible to diagnose situations in which as part of this assistance activity of the central bank towards commercial banks, including investment banks, the moral risk and disregard of the principles, methods and procedures of the banking risk management process, including credit risk management, liquidity risk, may be neglected. debt risk and other risk categories.

For example, if central banking suggests to commercial banks, including investment banks operating on capital markets, that in the event of a financial crisis it will help to eliminate the potential risk of bankruptcy of many entities of the financial system, then how these declarations translate into an approach to improving the credit risk management process and to comply with banking procedures regarding lending and securities operations and to comply with good business practices? In my opinion, such unwritten declarations can increase moral risk and reduce pressure and the need to improve credit risk management processes. Does any of you examine this issue in the context of analyzing sources, factors of financial and economic crises? I am researching this issue and invite you to cooperation. I described the results of my research in scientific publications that are available on the Research Gate portal. I invite you to cooperation.

In line with the above, in my opinion, the impact of monetary policy of central banking on shaping the security of the financial system can be significant. In the past, there have been such situations that the erroneous monetary policy of central banking has significantly contributed to the lowering of the level of security of the financial system and has become one of the factors causing the financial crisis. This was the case at the end of the 20th century and the beginning of the current 21st century, which led to the generation of the global financial crisis in 2008.

Do you agree with me on the above matter?

I conduct research in this area. The conclusions of the research I published in scientific publications that are available on the Research Gate portal.

Thank you very much

Best wishes

Dariusz Prokopowicz

For the Albanian economy it is true that the rise of M and the fall of i have no impact on the inflation rate. Monetary policy has failed, no transmission effect. I've given my arguments. I have proposed changing the central bank's objective.

A lot has changed since December 2019. Therefore, I would like to add a few words to my comment above. A SARS-CoV-2 Coronavirus pandemic has emerged. Due to the development of the SARS-CoV-2 coronavirus pandemic causing Covid-19 disease, many companies, enterprises suspend operations or entrepreneurs close their companies and service facilities in an increasing number of sectors and industries. Many companies are already recording large declines in sales and profits, limiting employment and / or stopping their business. In order to reduce the scale of economic slowdown forecast for 2020 and the occurrence of the global economic crisis, interventionist, anti-crisis socio-host policies are currently being introduced in many countries, including fiscal policies based on tax breaks and mild, pro-development central banking policies. As part of monetary policy, central banks reduce interest rates, launch loans for commercial banks on preferential terms, buy lost loans from commercial banks and / or implement sovereign bond buy-back programs to maintain liquidity in the commercial and public financial system of the state. However, if this type of monetary policy is used for several months or more, it may lead to a significant increase in inflation and increase the risk of hyperinflation.

Regards

Dariusz Prokopowicz