Studying Differing Impacts of Various Monetary Aggregates on the Real Economy

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

Introduction and Motivation

·       The paper is a little hard to read (for me). The ideas don’t flow naturally. As such, the motivation is not very clear to me. The authors should clearly state what motivates the research. In doing so, the authors should consider the following:

o   Is Romania a case study for all the non-euro member countries? If so, it should be explicitly stated. Also (in that case), how does the performance of Romania historically compare to the other non-euro member countries?

o   The authors mentioned that Romania and Bulgaria are still sticking to their national currencies despite being a part of the European Union. If this is the main distinguishing feature for which the author focuses on Romania, the author should state in clear terms how the adoption of the Euro as a currency could have impacted the macroeconomy of Romania during these periods of economic turmoil.

o   The authors provide some motivation in the first paragraph of the conclusion. This could serve as a good opening for the paper.

Literature Review

·       There is too much space devoted to the literature review. Please consider shortening this part (without necessarily taking out any relevant literature).

Methodology

·       Consider using simpler variable names, especially for Share in GDP (M3 or M2 or M1), and Total debt to GDP (%). The current variable names are hard to track in the estimated models.

·       Also, in page 8 (below equation 3), the use of the word influence multiple times in same sentences makes it harder to follow the authors’ statements (conclusions) regarding the estimated model. Please consider other words to avoid the confusion. The same goes for the statements (conclusions) under equations 5 and 7.

Other comments

·       There is a lot of discussion about monetary policy and monetary policy indicators. It would be helpful to distinguish between these two phrases with examples (at least at the first mention) to help paint a better picture for the reader.

Comments on the Quality of English Language

I am not a native speaker. As such, I might no be able to give a useful advice on the quality of the language. However, I think the presentation could be better with minor changes in the language, including the use of simpler and more straight-forward sentences.

Author Response

Dear reviewer,

For the beginning we want to thank you for your support in publishing this paper. Our research team read carefully all your pertinent observations and proposals. As a result, the whole paper was transformed and completed.  The title of the paper was changed, the statistical analyzed period was extended. These changes supported a new analysis in which all figures and tables were changed. Of course, the analysis related to them was changed, as well. In this new form, we hope that our paper will satisfy you.

• The paper is a little hard to read (for me). The ideas don’t flow naturally. As such, the motivation is not very clear to me. The authors should clearly state what motivates the research. In doing so, the authors should consider the following:

o   Is Romania a case study for all the non-euro member countries? If so, it should be explicitly stated. Also (in that case), how does the performance of Romania historically compare to the other non-euro member countries?

Authors: We did it in Introduction section according to your pertinent opinion.

o   The authors mentioned that Romania and Bulgaria are still sticking to their national currencies despite being a part of the European Union. If this is the main distinguishing feature for which the author focuses on Romania, the author should state in clear terms how the adoption of the Euro as a currency could have impacted the macroeconomy of Romania during these periods of economic turmoil.

Authors:  We introduced large explications in Introduction above the research objectives.

o   The authors provide some motivation in the first paragraph of the conclusion. This could serve as a good opening for the paper.

Literature Review

• There is too much space devoted to the literature review. Please consider shortening this part (without necessarily taking out any relevant literature).

Authors: We focused on significant literature. As a result, we eliminated some references in the paper.

Methodology

• Consider using simpler variable names, especially for Share in GDP (M3 or M2 or M1), and Total debt to GDP (%). The current variable names are hard to track in the estimated models.

Authors: According to your suggestion, we redefined the analyzed variables under a better readability.

• Also, in page 8 (below equation 3), the use of the word influencemultiple times in same sentences makes it harder to follow the authors’ statements (conclusions) regarding the estimated model. Please consider other words to avoid the confusion. The same goes for the statements (conclusions) under equations 5 and 7.

Authors: We changed necessary words, according to your opinion, in order to improve readability.

Other comments

• There is a lot of discussion about monetary policy and monetary policy indicators. It would be helpful to distinguish between these two phrases with examples (at least at the first mention) to help paint a better picture for the reader.

Authors: We made necessary comments at the end of Literature section.

Reviewer 2 Report

Comments and Suggestions for Authors

This article is not what it says it is and should not be published in its current form.

Despite the title, which suggests a potentially significant contribution to monetary policy, the research presented, is as I read it, an analysis of the varying relationship of differing monetary aggregates upon different variables in a static rather than longitudinal setting. How monetary aggregates M1, M2 and M3 impact (notwithstanding the very significant issue as to what is the direction of causality) can change in relation to shocks or anticipated shocks in some relation to short changes in the monetary velocity of circulation (not discussed in the paper) and movements in agent precautionary balances that in turn can be a function of some complex array of variables such as expectations (rational or otherwise), leverage, market stability and so on and so forth.

Further, the complex issue of effective monetary transmission channels is not (with the exception of an oblique reference in the literature review) given the consideration it requires. This is a complex and controversial area, but one that is at the heart of many debates regarding the effectiveness of Quantitative Easing on the real economy.

There is also the critical issue of how the exchange rate moves. As a non Euro EU Member State, the Romanian currency is not pegged and so can vary in value to the Euro, whilst the economy is necessarily fully open as a result of the EU Single Market, thereby allowing the free flow of capital across borders. Local monetary policy changes can often manifest themselves across the exchange rate (see for example recent experiences in Turkey), and in turn exchange rate dynamics are known to have significant real economic impacts.

Additionally, (and this is less unexpected), there is no mention of the relation between Wicksell’s natural rate of interest and the more fashionable neutral rate of interest. The authors may find exploration of this difference illuminating when addressing the issue as to whether monetary stability in financial asset markets can be aligned to monetary stability in real markets.

The whole area is very complex and controversial, but both the introduction and literature review serve to express how limited the authors knowledge is of the differing theories and prior work is. The first line of the article cites an emerging “hyper inflation”, yet there is no data or reference to support this statement which when I check the data and definitions of Hyper inflation is not supported. Line 43 talks about EU imposed monetary austerity measures which is nonsense. The austerity was fiscal whilst the European Central Bank followed a counteracting expansionary monetary policy, especially after the Mario Draghi “whatever it takes” speech.

The literature section of the paper is weak and needs rewriting to include some of the more important work in this area including Friedman, Keynes, Wicksell, Taylor maybe Neil Woodford, Cagen, AW Phillips, Laidler,  Thomas Sargent and more recently Tobais Adrian (who is now in a senior role at the IMF) and may others. Some of Larry Summers recent writings are also worth a read; the point is that a whole literature and associated debate is missing; and these writers directly impact upon the stated aim of this paper.

So what are the options?

I would suggest the authors consider either rewriting the paper from scratch or giving it a title that is more aligned to its results – perhaps something along the following lines:-

An empirical study into the impact of differing impacts of various monetary aggregates upon the real economy.

If they decide to chance the title, I would suggest they may want to either use a longitudinal dataset to show relationships over time and see if the results they present hold stead over say a 15 or 20 year period, and perhaps see what the impact of Romanian accession to the EU and full entry into the EU Single Market has had.

If they chose to do this, much of the existing text could remain, although some of the “howling errors” like the ones mentioned above need to be corrected in the introduction and literature review. They will also need to add formal definitions for M1, M2 and M3 as expressed in the data sets they are using.

With that change in direction this could become an interesting piece of work that would add to the body of knowledge.

Author Response

Dear reviewer,

For the beginning we want to thank you for your support in publishing this paper. Our research team read carefully all your pertinent observations and proposals. As a result, the whole paper was transformed and completed.  The title of the paper was changed, the statistical analyzed period was extended. These changes supported a new analysis in which all figures and tables were changed. Of course, the analysis related to them was changed, as well. In this new form, we hope that our paper will satisfy you.

This article is not what it says it is and should not be published in its current form.

Despite the title, which suggests a potentially significant contribution to monetary policy, the research presented, is as I read it, an analysis of the varying relationship of differing monetary aggregates upon different variables in a static rather than longitudinal setting. How monetary aggregates M1, M2 and M3 impact (notwithstanding the very significant issue as to what is the direction of causality) can change in relation to shocks or anticipated shocks in some relation to short changes in the monetary velocity of circulation (not discussed in the paper) and movements in agent precautionary balances that in turn can be a function of some complex array of variables such as expectations (rational or otherwise), leverage, market stability and so on and so forth.

Authors: We made necessary comments. Moreover, they were supported by a new Table 1 and a new Figure 5.

Further, the complex issue of effective monetary transmission channels is not (with the exception of an oblique reference in the literature review) given the consideration it requires. This is a complex and controversial area, but one that is at the heart of many debates regarding the effectiveness of Quantitative Easing on the real economy.

Authors: According to your point of view, we realized the connection between monetary aggregates and Quantitative Easing on the real economy after Figure 2.

There is also the critical issue of how the exchange rate moves. As a non Euro EU Member State, the Romanian currency is not pegged and so can vary in value to the Euro, whilst the economy is necessarily fully open as a result of the EU Single Market, thereby allowing the free flow of capital across borders. Local monetary policy changes can often manifest themselves across the exchange rate (see for example recent experiences in Turkey), and in turn exchange rate dynamics are known to have significant real economic impacts.

Authors: We introduced a new analysis which is supported by a new Figure 3 in the paper. We put together the trends of the monetary aggregates and exchange rate and pointed out the correlations between them.

Additionally, (and this is less unexpected), there is no mention of the relation between Wicksell’s natural rate of interest and the more fashionable neutral rate of interest. The authors may find exploration of this difference illuminating when addressing the issue as to whether monetary stability in financial asset markets can be aligned to monetary stability in real markets.

Authors: We introduced these concepts in Introduction section.

The whole area is very complex and controversial, but both the introduction and literature review serve to express how limited the authors knowledge is of the differing theories and prior work is. The first line of the article cites an emerging “hyper inflation”, yet there is no data or reference to support this statement which when I check the data and definitions of Hyper inflation is not supported. Line 43 talks about EU imposed monetary austerity measures which is nonsense. The austerity was fiscal whilst the European Central Bank followed a counteracting expansionary monetary policy, especially after the Mario Draghi “whatever it takes” speech.

Authors: We made the correction at the beginning of the paper. Moreover, we rebuilt the scientific approach about inflation and supported it by new Figure 4. We made correction in Line 43, as well.

The literature section of the paper is weak and needs rewriting to include some of the more important work in this area including Friedman, Keynes, Wicksell, Taylor maybe Neil Woodford, Cagen, AW Phillips, Laidler,  Thomas Sargent and more recently Tobais Adrian (who is now in a senior role at the IMF) and may others. Some of Larry Summers recent writings are also worth a read; the point is that a whole literature and associated debate is missing; and these writers directly impact upon the stated aim of this paper.

Authors: We have introduced all references you proposed us. Thank you for your support!

So what are the options?

I would suggest the authors consider either rewriting the paper from scratch or giving it a title that is more aligned to its results – perhaps something along the following lines:-

An empirical study into the impact of differing impacts of various monetary aggregates upon the real economy.

If they decide to chance the title, I would suggest they may want to either use a longitudinal dataset to show relationships over time and see if the results they present hold stead over say a 15 or 20 year period, and perhaps see what the impact of Romanian accession to the EU and full entry into the EU Single Market has had.

Authors: For the beginning, we changed the title of the paper with that suggested by you “An empirical study regarding differing impacts of various monetary aggregates on the real economy”. In relation to the analysis period, we have extended it to 16 years (2007-2022). The reason for choosing this period is given in the text above the presentation of the analysis indicators. As a result, all model equations were changed and the trends were defined again.

If they chose to do this, much of the existing text could remain, although some of the “howling errors” like the ones mentioned above need to be corrected in the introduction and literature review. They will also need to add formal definitions for M1, M2 and M3 as expressed in the data sets they are using.

Authors: We introduced necessary definitions according to your opinion in the text regarding the analyzed indicators.

With that change in direction this could become an interesting piece of work that would add to the body of knowledge.

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

This revision is a significant step forward, although the abstract needs to be realigned to what the article discuses. The conclusion at lines 670 - 676 is solid, although can be reached by numerous different routes; and the study does not deal with the problems of the direction of causality that are inherent in any study such as this. This is not unique to this study, and will no doubt be highlighted in any potential citing works.

If I were writing a critique, I would highlight the role of the exchange rate in all of this; and also build in some comments regarding the adjustment mechanism in the Euro system (which would be the same as the Gold Standard of Classical Economics were it not to do with the variations in Target 2 balances, which are the oil that in my own view makes the whole thing work, although I have no idea what final end point of ever growing imbalances in Target 2 unless a policy maker makes the unwise decision that these should all be forced back to zero.

Thankfully, as Romania is not part of the Euro this very complex Target 2 issue is not relevant to this study. But in the light of the issue I would urge the authors to be a bit more cautious in their statements around lines 100 - 123. I am not sure how this study supports them.

The discussion in between lines 73 and 92 and again between 160 and 295 is helpful but is rather selective. It is helpful as it gives a taste of some of underlying theoretical debate, but there are two fundamentals they may want to reflect on.

1. Wicksell's Natural Rate is all about matching monetary to real conditions, whereas more recent interpretations are more about either (i) balancing inflation with unemployment (Phillips vs the Friedman 1968 AEA lecture) and (ii) even more recently about maintaining financial market equilibria in line with some real economy inflation target. It is a very complex area and still very much under development. I don't think they have to change their current text for this before publication.

2. The direction of causality in the monetary aggregates. Is money endogenous or is it exogenous to the overall system? Again an open question that does not have to be dealt with before publication, but they may want to add a couple of words that mention it. This would be a wise precaution.

All in all this rewrite is much better. If I were the authors, I would rewrite the abstract and then publish. My other comments are made to help give overall context - but changing for these is a very substantial piece of work and perhaps they may want to consider doing a following on article that addresses some of these issues.

Author Response

This revision is a significant step forward, although the abstract needs to be realigned to what the article discuses. The conclusion at lines 670 - 676 is solid, although can be reached by numerous different routes; and the study does not deal with the problems of the direction of causality that are inherent in any study such as this. This is not unique to this study, and will no doubt be highlighted in any potential citing works. If I were writing a critique, I would highlight the role of the exchange rate in all of this; and also build in some comments regarding the adjustment mechanism in the Euro system (which would be the same as the Gold Standard of Classical Economics were it not to do with the variations in Target 2 balances, which are the oil that in my own view makes the whole thing work, although I have no idea what final end point of ever growing imbalances in Target 2 unless a policy maker makes the unwise decision that these should all be forced back to zero.

Authors: We made necessary observations regarding these topics at the end of Section 4. Thank you for your interesting approach.

Thankfully, as Romania is not part of the Euro this very complex Target 2 issue is not relevant to this study. But in the light of the issue I would urge the authors to be a bit more cautious in their statements around lines 100 - 123. I am not sure how this study supports them.

Authors: We introduced one of the latest report of the European Commission which supported our approach in this problem. We made necessary observation in Introduction, up to research objectives.

The discussion in between lines 73 and 92 and again between 160 and 295 is helpful but is rather selective. It is helpful as it gives a taste of some of underlying theoretical debate, but there are two fundamentals they may want to reflect on.

1. Wicksell's Natural Rate is all about matching monetary to real conditions, whereas more recent interpretations are more about either (i) balancing inflation with unemployment (Phillips vs the Friedman 1968 AEA lecture) and (ii) even more recently about maintaining financial market equilibria in line with some real economy inflation target. It is a very complex area and still very much under development. I don't think they have to change their current text for this before publication.

Authors: We have used your point of view and made an observation about the complexity of this approach.

2. The direction of causality in the monetary aggregates. Is money endogenous or is it exogenous to the overall system? Again an open question that does not have to be dealt with before publication, but they may want to add a couple of words that mention it. This would be a wise precaution.

Authors: We made new comments under Figure 1.

All in all this rewrite is much better. If I were the authors, I would rewrite the abstract and then publish. My other comments are made to help give overall context - but changing for these is a very substantial piece of work and perhaps they may want to consider doing a following on article that addresses some of these issues.

Authors: We have rewriting the Abstract according to your point of view. Thank you again for your support in publishing our article.