Month: April 2019

Money and productivity growth: Could Liu, Mian and Sufi (2019) be right?

~ ebasci ~ Leave a comment

There are three common observations from the last few decades:

  1. Total factor productivity has slowed down,
  2. Interest rates have come down,
  3. Broad money growth has slowed down.

For details of the former you may wish to see the recent OECD data.

For the later you may check my blog entry on ‘Broad money growth before and after 2009‘.

Now, the big question is whether these observations are related, and how.  An easy  approach would be to take the productivity slowdown as a given fact of life and based on that to prove that interest rates have to be lower in equilibrium.  This obviously leaves the productivity slowdown unexplained.

A recent NBER paper by Liu, Mian and Sufi (2019), takes a very different modelling approach based on an interesting narrative:

“Using firm-level data from the OECD, Berlingieri and Criscuolo (2017) and Andrews et al. (2016) show that the productivity gap between the 90th versus 10th percentile firms within industries has been increasing since 2000.

(…) the key point of departure is the insight that if the interest rate falls to a low enough level, then the rise in market concentration may itself constrain growth.”

from page 5 in,

LOW INTEREST RATES, MARKET POWER, AND PRODUCTIVITY GROWTH

Ernest Liu, Atif Mian, Amir Sufi

Working Paper 25505, http://www.nber.org/papers/w25505

NATIONAL BUREAU OF ECONOMIC RESEARCH,  January 2019

© 2019 by Ernest Liu, Atif Mian, and Amir Sufi

 

If there is truth in this striking and novel analysis, the fall in interest rates after the global financial crisis can theoretically be associated with the slowdown in the growth rate of productivity (and also of broad money).  But the causality this time runs from low demand and the associated low interest rates, to higher concentration, lower competition, lower innovation and thereby lower productivity growth.

These three empirical trends have been pronounced especially in Europe (after 2009) and in Japan (after 1995).  Reasons are still not so clear.

It is therefore very much worth thinking and working on this new approach and narrative further.

 

 

 

Broad money growth before and after 2009

~ ebasci ~ 1 Comment

Money growth in Europe before the global financial crisis (GFC) has been significantly above the reference rate initially set by the European Central Bank (ECB).

After the GFC, it is significantly below it.

 

                                                 M3 Growth
                        1999-2008     Reference     2009-2018

Eurozone                    7,7            4,5              2,9

UK                                 9,4             –               3,8

US                                  6,4             –               6,2

Sources: 
Organization for Economic Co-operation and Development, M3 for the Euro Area [MABMM301EZA657S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MABMM301EZA657S, April 6, 2019.
Organization for Economic Co-operation and Development, M3 for the United Kingdom [MABMM301GBA657S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MABMM301GBA657S, April 7, 2019.
Organization for Economic Co-operation and Development, M3 for the United States [MABMM301USA189S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MABMM301USA189S, April 6, 2019.
Averages over the two ten year periods are simple arithmetic averages and are author’s calculations. The OECD tells it  uses M2 as a proxy for M3 in US, since it is not published after 2006 any more.

A similar pattern is observed in UK.   Remarkably high money growth before the GFC and a noticeably low one after the GFC.

In the US, however, the average broad money growth both before and after the GFC were very similar at slightly above 6 percent.  This rate seems comfortable enough to accommodate a real GDP growth of around 3 percent, a price inflation of 2 percent and an additional increase in real money demand of 1 percent per annum.

Why did a similar outcome fail to realize in the Eurozone, where the ECB did have an initial emphasis on a monetary pillar around a reference broad money (M3) growth rate of 4,5 percent?

Why did the ECB stop mentioning the 4,5 percent reference rate after the Spring of 2003?

Why does broad money growth in the Eurozone fall short of 4,5 percent recently?

These are good questions to think about.