Money is for making transaction easier, to make accounts easier, and to store it for future consumption. This is pointed by economic books; however, after studying the monetary theory and reading monetary cases around the World, one tends to add this function also: printing money has to be managed to achieve fair income distribution; therefore, it is time to work on microeconomic issues about printing money.
Nowadays, there is topic about the Monetary Authorities duties. Most of Centrals Banks around the World have to look after for low inflation and fair economic development, but they put strong effort in the first duty, low inflation. Colombia is in this list, Central Bank of Colombia has been working hard to get this trophy, and they won it. However, the cost was a high unemployment rate; it was 9.6% in 2012 and 9.0% in September of 2013. In Colombia, when monetary authorities go to show their results in front of colombian Congress, they broadcast good indicators such as positive monetary supply growth rates, monetary policies that mitigate the GDP cycles, lower inflation rate and so. Of course, colombian Central Bank is full of professional of best skills; most of them have a Magister and PhD studies in many subjects, so their results have many filters to be consistent. This note shows indicators that support monetary authorities under aggregate view such as inflation, but Central Bank’s results in terms of economic development are critical. It is time to think on improving money channels (ways to supply money); to align fair economic development, money has to make their job through supporting the supply of public goods such as water, energy, transport, pensions and health. It does not mean irresponsible money supply, so it means new channels to give the printing money. Microeconomic theory can be used to reach this target.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Central Bank in Colombia is on charge of keeping low inflation, but ensuring economic development (Art. 372 and 373 Colombia Constitution). Unfortunately, Monetary Policy has working on reducing the inflation rate without huge contribution to keep unemployment rate low. The inflation rate between 1970 and 1990 showed an annual average of 22.3% and unemployment rate showed an annual average of 10.1%; from 1991 to 2012 the annual average inflation rate showed a decline until 11.4%, but the average unemployment rate increased to 11.8%. Therefore, it is a clear evidence of laking of awareness from monetary authorities about the social cost in terms of unemployment in a country that faces unfair income distribution and high indicators of extreme poverty. This note points the efficiency of Monetary Policy in aggregate terms, but inefficiency in terms of economic development.
Monetary Policy has been mismanaged because unemployment in Colombia has been above 7.0% since 1964. From 1964 to 2000 the money supply in Colombia showed a declining trend as a share of colombian Gross Domestic Product (GDP) as figure 1 shows; this share went from 10.8% in 1970 to 5.5% in 2000; it means relative fewer notes and coins to make transactions throughout this period, so people faced lacking of monetary liquidity. This economic policy brought a high unemployment rate during this period; unemployment rate was between 7.0% and 19.9%. Therefore, Monetary Authorities forgot working on fair economic development, or they did not take into account the correct economic tools to fight against poverty and unemployment. Economic development, under monetary view, means aggregate and individual impact due to monetary policy. If one reviews the Central Bank researcher's work, one finds lot work on monetary impact on aggregate variables, mainly financial aggregate variables, but null works on monetary impact on public goods. This fact is because Central Bank just gives cheap money to financial system, and financial system works on how to make private profits with public money without its social cost!!!.
Figure 1. M1 as percentage of GDP in Colombia
1924 - 2012
(Annual data %)
Source: Central Bank of Colombia and Bureau of Statistics Colombia (DANE). Own calculations.
Although money supply started to increase as a share in GDP since 2001, it has not been enough to sort out unemployment rate in Colombia. Since 2001 the share of M1 (money supply) in GDP in Colombia has showed an increase; it went from 5.6% in 2001 to 11.0% in 2012; however, the unemployment rate is above of 9.6% still. The problem is the printing money has showed positive rates, but they has been lower since 2003 as figure 2 show.
Figure 2. M1 annual quarterly growth rate in Colombia
1932 - 2013
(Data smoothed, %)
Source: Central Bank and Bureau of Statistics Colombia. Own calculations.
The Central Bank of Colombia shows excellent financial aggregate results, but low economic development results.The Central Bank can show excellent aggregate indicators such as positive money supply growth rates, an increasing supply money as a share of GDP; moreover, they can show that the monetary policy is contra-cycle as figure 3 shows; it means as the economy starts a downturn, the monetary authorities take an active job to mitigate it. However, their impact on economy is biased; this monetary policy goes to support private financial system mostly. Economic crisis are alerts that economic development is in danger, but just supporting the financial sector does not make strong difference; therefore, Monetary Policy have to work on key economic variables to take advantage of economic crisis. These key variables are poverty indicators, public transport, water supply, energy supply and so.
Figure 3. Real monetary supply (M1) per capita cycle in Colombia 1932 - 2013
(quarterly data)
Source: Central Bank of Colombia and Bureau of Statistics Colombia (DANE). Own calculations.
In conclusion, Colombian Central Bank has working properly to reduce inflation rate. They know the monetary impact from macroeconomic view, and work on financial system to mitigate economic crisis. However, they do not pay enough attention to reaching economic development. Socioeconomic indicators related with income distribution are same as 49 years ago; they have changed marginally. It is a call for working on the impact of monetary supply on public goods from a microeconomic view. Of course, high corruption has to be taken as a restriction in this type of microeconomic models.
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