Home > Monetary Policy > Broad Monetarism and UK NGDP

Broad Monetarism and UK NGDP

There’s long tradition of “broad monetarism” in the UK, a theory which holds that a) central banks should aim to stabilise some measure of the broad money supply, and b) such measures of money are both predictive and “lead” the nominal economy with some lag.

Steve Hanke has a series of blog posts (for example here and here) showing a collapse in the Bank of England’s “M4” measure of UK.  Active UK-based broad monetarists include Tim Congdon and Simon Ward, and many members of the IEA’s Shadow Monetary HawksPolicy Committee have a broad monetarist leaning.  (A few on the SMPC such as Anthony Evans and Jamie Dannhausert do also look at NGDP.)

In recent years, as in the 1980s, broad money has not been strongly correlated with nominal GDP growth, because the velocity of circulation has not been constant.  It also remains hard to pick a “useful” measure of broad money.  The Bank of England itself dropped the focus on the M4 series which Steve Hanke referenced, in favour of a new series, “M4ex“, which excludes deposits in certain financial intermediaries – think the “shadow banking” sector.

Here is a graph of M4ex growth and nominal GDP growth:

UK Nominal GDP and M4ex.  Source: ONS, Bank of England

UK Nominal GDP and M4ex.  Source: ONS (YBHA), Bank of England Series RPQB53Q

And here’s the graph of M4ex velocity:

M4ex Velocity.  Source: BoE, ONS as above

M4ex Velocity. Source: ONS, BoE, as above

Categories: Monetary Policy
  1. James in London
    March 29, 2013 at 15:08

    Looks like our current QE is rather ineffective, like pushing water uphill. Treading water would be OK but that fall in velocity is not very promising. Still, what can we expect when both the Governor and the Monetary Policy chief are together outvoted on their own monetary policy committee.

  2. March 29, 2013 at 18:01

    Try Divisia ex OFCs (LPQB6F3) and the association is much stronger – surges 09/10 (QE) and then slumps back down from late 2010 and through 2011. There’s also not the frothy period just before the crash (which suggests that was just accumulating in low-transaction forms).

    • March 29, 2013 at 18:25

      Duncan – oh, interesting! I’m very busy for the next week but I’ll do a new post on that.

  3. March 30, 2013 at 17:09

    The wife was out, so I knocked a post up here…


  4. W. Peden
    April 9, 2013 at 10:36

    Financial intermediaries have distorted UK figures for some time: I looked at long-term charts of M4 by sector (going back to 1976) and noticed that-

    (1) Financial intermediary M4 was associated with changes in asset prices, but not NGDP.

    (2) Corporate M4 had a foreward-looking relation to NGDP.

    (3) The velocity of household M4 was much more stable than for any other sector and had followed a gradual downward trend since banking deregulation got started in 1979.

    If financial intermediaries don’t do groceries and don’t build factories, then doesn’t it make sense that their money holdings and expenditures will be relevant to asset prices, but not to expenditures on final goods i.e. NGDP? Hence it would make sense to cut out ALL financial intermediaries and just look at non-financial M4 if NGDP is your concern.

    Duncan Brown is right to bring up Divisia money. I’ve been convinced by “Getting It Wrong” that the normal ways of aggregating money make little sense.

  5. W. Peden
    April 9, 2013 at 10:39

    Also, Tim Congdon noted that broad money primarily impacts asset prices first, then real growth, and only later inflation. So while non-financil Divisia-M4 is growing far ahead of NGDP right now, stock market prices are growing very strongly and even the housing market is picking up a bit.

  6. W. Peden
    April 9, 2013 at 10:41

    (Sorry for the triple post.)

    That’s William Barnett’s “Getting It Wrong”, which I highly recommend.

    • April 9, 2013 at 10:45

      Aha, that’s the William Barnett who put a comment on my Divisia post.

      Congdon also says similar things to you (W Peden) about corporate and household money demand – that corporate holdings are more volatile but transmit pretty directly to output, and that household demand is stable.

      • W. Peden
        April 9, 2013 at 13:20

        Yep: there were a series of econometric studies of the UK demand for money on a sector-by-sector basis by R. Thomas back in the 1990s.

        Chart 3 here is very interesting: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb960204.pdf

        – as it shows how the rise of the OFCs and the UK financial sector generally drove the dramatic fall in M4 velocity in the 1980s.

        I haven’t seen any in-depth studies of US aggregates on a sector basis, unfortunately.

    • April 11, 2013 at 20:57

      Great discussion here – thanks for all the comments. The Ryland Thomas paper is fascinating. Does anybody know, is there a good data source for historic UK monetary aggregates? The BoE database does not seem to go back far, and I can’t get even simple things like the monetary base size out of it.

      • April 11, 2013 at 21:02

        The main historic data is in Capie and Webber’s Monetary History of the UK. A subset of this data is on the BoE Three Centuries of Data spreadsheet – goes back to 1870s, but annually only.

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