20140306-NATIXIS-Is_the_quantity_of_money__in_its_various_definitions__a_leading_indicator_of_growth__12页_448kb

Summary of FLASH ECONOMICS: Is the Quantity of Money a Leading Indicator of Growth?

Core Content

This document explores the relationship between monetary aggregates (M0, M1, M2, M3) and GDP growth in the United States, the United Kingdom, the euro zone, and Japan. It investigates whether the growth of these aggregates can serve as a leading indicator for future real or nominal GDP growth, analyzing correlations and trends across different regions.

Main Points

• M0 (Monetary Base):

  • M0 growth is not a reliable leading indicator for real or nominal GDP growth in any of the four regions.
  • It is primarily a coincident or lagging indicator, with limited predictive power.

• M1 (Demand Deposits and Bank Notes):

  • M1 is a leading indicator for real and nominal GDP growth in the euro zone, with a predictive horizon of two to three quarters.
  • In the United States and Japan, M1 is a poor leading indicator, and in the United Kingdom, it acts as a coincident indicator.
  • Since the spring of 2013, M1 growth in the euro zone has slowed, suggesting a potential growth slowdown in 2014.

• M2 (M1 + Time Deposits and Passbook Savings Accounts):

  • M2 acts as a coincident indicator for real GDP in the United Kingdom and for nominal GDP in the euro zone.
  • In the United States and Japan, M2 has shown moderate growth, but it is not a leading indicator for GDP.

• M3 (M2 + Money Market Funds):

  • M3 has no predictive value in the United Kingdom and Japan.
  • In the euro zone, it is a coincident indicator of nominal GDP growth.

Key Information

• Trends in M0:

  • M0 has increased rapidly since 2008, with a particularly sharp rise in Japan since 2013.

• Trends in M1:

  • M1 has grown rapidly in the United States and the United Kingdom.
  • Growth has been slower in the euro zone and Japan.

• Trends in M2:

  • M2 has seen moderate growth in the United States, the United Kingdom, and Japan.
  • Growth has slowed sharply in the euro zone.

• Trends in M3:

  • M3 is no longer calculated in the United States.
  • It has slowed in the United Kingdom and Japan and is a coincident indicator in the euro zone.

Correlation Data

Aggregate	Real GDP Correlation	Nominal GDP Correlation
M0	-0.74 (US Q+0), -0.62 (UK Q+0), -0.26 (Euro Q+0), -0.18 (Japan Q+0)	-0.76 (US Q+0), -0.60 (UK Q+0), -0.30 (Euro Q+0), -0.12 (Japan Q+0)
M1	0.12 (US Q+0), 0.51 (UK Q+0), 0.12 (Euro Q+0), -0.21 (Japan Q+0)	0.10 (US Q+0), 0.53 (UK Q+0), 0.31 (Euro Q+0), -0.17 (Japan Q+0)
M2	-0.33 (US Q+0), 0.51 (UK Q+0), 0.14 (Euro Q+0), -0.26 (Japan Q+0)	-0.36 (US Q+0), 0.57 (UK Q+0), 0.31 (Euro Q+0), -0.24 (Japan Q+0)
M3	-0.02 (UK Q+0), 0.23 (Euro Q+0), -0.17 (Japan Q+0)	0.06 (UK Q+0), 0.40 (Euro Q+0), -0.17 (Japan Q+0)

Conclusion

• Only M1 in the euro zone is a reliable leading indicator of GDP growth (both real and nominal), two to three quarters ahead.
• The slowdown in M1 growth in the euro zone since 2013 suggests a potential slowdown in GDP growth in 2014.
• For the United States, the United Kingdom, and Japan, M0 and M3 do not show predictive value for GDP growth.
• M2 acts as a coincident or lagging indicator in most regions, with limited predictive power.
• The study emphasizes that monetary aggregates are not always reliable predictors of economic growth and that their effectiveness varies by region and type of GDP (real vs. nominal).

Disclaimer

• This document is confidential and intended solely for the use of the addressee.
• It is not an independent investment research report and not a personalized recommendation.
• No liability is accepted by Natixis for any financial loss or decision based on this document.
• The information is based on public data and may be subject to change or withdrawal at any time.
• The opinions expressed reflect the author's personal views and not those of Natixis or any other party.