Money supply impact on investment and GDP: statistical analysis
The question of how the changes in money supply influence investment and GDP have been studied intensively in recent history. However, not all aspects of this impact are sufficiently researched. In particular, the "new normality" (that has evolved recently) limits the use of well-known cla...
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Lypnytskyi, D.V. Lypnytska, P.D. 2023-06-22T12:35:14Z 2023-06-22T12:35:14Z 2022 Money supply impact on investment and GDP: statistical analysis / D.V. Lypnytskyi, P.D. Lypnytska // Економіка промисловості. — 2022. — № 1 (97). — С. 89-102. — Бібліогр.: 28 назв. — англ. 1562-109Х DOI: http://doi.org/10.15407/econindustry2022.01.089 JEL: G18, G28, C12, C22 https://nasplib.isofts.kiev.ua/handle/123456789/190792 330.55.051+336.748.77:330.322 The question of how the changes in money supply influence investment and GDP have been studied intensively in recent history. However, not all aspects of this impact are sufficiently researched. In particular, the "new normality" (that has evolved recently) limits the use of well-known classical concepts and models in monetary policy, especially for emerging economies to which Ukraine belongs. Thus, the subject of this study was to assess the relationship between monetary aggregates, investment, and GDP by the world economic data analysis using mathematical statistics. As the information base for the study, the World Bank official statistics were taken (including broad money, gross capital formation, and GDP). More than 71% of all investigated countries showed a significant correlation between M3 and gross investment. The issue of how the strength of this relationship depends on the level of socio-economic development was investigated. Classification of countries was carried out using the “nearest neighbors” method in a two-dimensional feature space, namely, per capita income and correlation tightness. The analysis showed that 79% of all countries fall into the class with a proven high correlation. Moreover, their level of wealth and development was irrelevant. A cluster analysis of countries was fulfilled in the chosen feature space using the “mean shift” method. With the help of this method, all countries have been distributed into five clusters with different socio-economic conditions and an accuracy of 91%. Among them, there was a group of countries highly sensitive to change in monetization, up to extremely negative economic impacts. The study helped to conclude that, regardless of economic development, GDP benefits from an increase in the money supply. Although this factor is considered necessary, it is nevertheless not sufficient for economic growth, especially in the time of the fourth industrial revolution, when the government has to play a more active and complex role in accelerating national technological development. Незважаючи на те що вплив грошової маси на інвестиції та ВВП активно досліджується, не всі аспек¬ти цього процесу вивчені достатньою мірою. Це, зокрема, пов'язано з «новою нормальністю», яка склалася останнім часом. Її особливості не дозволяють вико¬рис¬товувати класичні концепції та моделі для формування ефективної монетарної політики, тим більше у специфічних умовах емерджентної економіки, до якої належить Україна. Метою статті є визначення взаємозв'язку грошових агрегатів, інвестицій та ВВП у нових умовах шляхом аналізу часових рядів економічних даних. Інформаційною базою дослідження є статистика Світового банку за країнами світу з показниками «широких» грошей (М3) і валових інвестицій. Статистичний аналіз дозволив встановити, що понад 71% розглянутих країн мають суттєву кореляцію між М3 та валовими інвестиціями. Визначено, наскільки сила кореляції залежить від рівня соціально-економіч¬ного розвитку. Для цього на основі методу «найближчих сусідів» здійснено класифікацію країн у двовимірному просторі: за параметрами доходу на душу населення і щільності зв'я第ку М2 та інвестицій. Аналіз свідчить, що 79% з усіх розглянутих країн опинилися в класі з доведеною високою кореляцією, причому незалежно від рівня їхнього багатства та розвитку. У цьому ж просторі ознак виконано кластерний аналіз країн із використанням методу «зрушення середнього», який дозволив із точністю 91% розподілити країни на п'ять кластерів із різними соціально-економічними умовами, а також виокремити групу країн, особливо чутливих до зниження рівня монетизації, аж до негативних наслідків для економіки. Доведено, що незалежно від рівня розвитку економіки зростання «широкої» грошової маси є чинником, який істотно впливає на зростання ВВП. Незважаючи на те що даний чинник розглядається як необхідний, він не є достатнім для зростання економіки, особливо в період Четвертої промислової революції, коли держава має відігравати більш активну та складну роль у прискоренні національного техніко-технологічного розвитку. Несмотря на то что влияние денежной массы на инвестиции и ВВП активно исследуется, не все его аспекты достаточно изучены. В частности, сложившаяся в последние годы «новая нормальность» не позволяет использовать классические концепции и модели для формирования эффективной монетарной политики, тем более в специфических условиях эмерджентной экономики, к которой относится Украина. Целью статьи является определение взаимосвязи денежных агрегатов, инвестиций и ВВП в новых условиях посредством анализа временных рядов экономических данных. Информационной базой исследования является статистика Мирового банка по странам мира с показателями «широких» денег (М3) и валовых инвестиций. Статистический анализ позволил установить, что более 71% рассматриваемых стран показали существенную корреляцию между М3 и валовыми инвестициями. Определено, насколько сила корреляции зависит от уровня социально-экономического развития страны. Для этого на основе метода «ближайших соседей» проведена классификация стран в двухмерном пространстве: по параметрам дохода на душу населения и тесноты связи М2 и инвестиций. Анализ показал, что 79% из всех анализируемых стран оказались в классе с доказуемой высокой корреляцией, причем независимо от уровня их богатства и развития. В том же пространстве признаков выполнен кластерный анализ стран с использованием метода «сдвига среднего». Этот метод позволил с точностью 91% разделить страны на пять кластеров с различными социально-экономическими условиями, а также выделить отдельную группу стран, особенно чувствительных к снижению уровня монетизации, вплоть до самых негативных последствий для экономики. Доказано, что независимо от уровня развития экономики рост «широкой» денежной массы является фактором, существенно влияющим на рост ВВП. Несмотря на то что этот фактор рассматривается как необходимый, он, тем не менее, не является достаточным для роста экономики, особенно в период Четвертой промышленной революции, когда государство должно играть более активную и сложную роль в ускорении национального технико-технологического развития. en Інститут економіки промисловості НАН України Економіка промисловості Макроекономічні та регіональні проблеми розвитку промисловості Money supply impact on investment and GDP: statistical analysis Вплив грошової маси на інвестиції та ВВП: статистичний аналіз Влияние денежной массы на инвестиции и ВВП: статистический анализ Article published earlier |
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Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| collection |
DSpace DC |
| title |
Money supply impact on investment and GDP: statistical analysis |
| spellingShingle |
Money supply impact on investment and GDP: statistical analysis Lypnytskyi, D.V. Lypnytska, P.D. Макроекономічні та регіональні проблеми розвитку промисловості |
| title_short |
Money supply impact on investment and GDP: statistical analysis |
| title_full |
Money supply impact on investment and GDP: statistical analysis |
| title_fullStr |
Money supply impact on investment and GDP: statistical analysis |
| title_full_unstemmed |
Money supply impact on investment and GDP: statistical analysis |
| title_sort |
money supply impact on investment and gdp: statistical analysis |
| author |
Lypnytskyi, D.V. Lypnytska, P.D. |
| author_facet |
Lypnytskyi, D.V. Lypnytska, P.D. |
| topic |
Макроекономічні та регіональні проблеми розвитку промисловості |
| topic_facet |
Макроекономічні та регіональні проблеми розвитку промисловості |
| publishDate |
2022 |
| language |
English |
| container_title |
Економіка промисловості |
| publisher |
Інститут економіки промисловості НАН України |
| format |
Article |
| title_alt |
Вплив грошової маси на інвестиції та ВВП: статистичний аналіз Влияние денежной массы на инвестиции и ВВП: статистический анализ |
| description |
The question of how the changes in money supply influence investment and GDP have been studied intensively in recent history. However, not all aspects of this impact are sufficiently researched. In particular, the "new normality" (that has evolved recently) limits the use of well-known classical concepts and models in monetary policy, especially for emerging economies to which Ukraine belongs. Thus, the subject of this study was to assess the relationship between monetary aggregates, investment, and GDP by the world economic data analysis using mathematical statistics.
As the information base for the study, the World Bank official statistics were taken (including broad money, gross capital formation, and GDP). More than 71% of all investigated countries showed a significant correlation between M3 and gross investment. The issue of how the strength of this relationship depends on the level of socio-economic development was investigated. Classification of countries was carried out using the “nearest neighbors” method in a two-dimensional feature space, namely, per capita income and correlation tightness. The analysis showed that 79% of all countries fall into the class with a proven high correlation. Moreover, their level of wealth and development was irrelevant.
A cluster analysis of countries was fulfilled in the chosen feature space using the “mean shift” method. With the help of this method, all countries have been distributed into five clusters with different socio-economic conditions and an accuracy of 91%. Among them, there was a group of countries highly sensitive to change in monetization, up to extremely negative economic impacts.
The study helped to conclude that, regardless of economic development, GDP benefits from an increase in the money supply. Although this factor is considered necessary, it is nevertheless not sufficient for economic growth, especially in the time of the fourth industrial revolution, when the government has to play a more active and complex role in accelerating national technological development.
Незважаючи на те що вплив грошової маси на інвестиції та ВВП активно досліджується, не всі аспек¬ти цього процесу вивчені достатньою мірою. Це, зокрема, пов'язано з «новою нормальністю», яка склалася останнім часом. Її особливості не дозволяють вико¬рис¬товувати класичні концепції та моделі для формування ефективної монетарної політики, тим більше у специфічних умовах емерджентної економіки, до якої належить Україна. Метою статті є визначення взаємозв'язку грошових агрегатів, інвестицій та ВВП у нових умовах шляхом аналізу часових рядів економічних даних.
Інформаційною базою дослідження є статистика Світового банку за країнами світу з показниками «широких» грошей (М3) і валових інвестицій. Статистичний аналіз дозволив встановити, що понад 71% розглянутих країн мають суттєву кореляцію між М3 та валовими інвестиціями. Визначено, наскільки сила кореляції залежить від рівня соціально-економіч¬ного розвитку. Для цього на основі методу «найближчих сусідів» здійснено класифікацію країн у двовимірному просторі: за параметрами доходу на душу населення і щільності зв'я第ку М2 та інвестицій. Аналіз свідчить, що 79% з усіх розглянутих країн опинилися в класі з доведеною високою кореляцією, причому незалежно від рівня їхнього багатства та розвитку. У цьому ж просторі ознак виконано кластерний аналіз країн із використанням методу «зрушення середнього», який дозволив із точністю 91% розподілити країни на п'ять кластерів із різними соціально-економічними умовами, а також виокремити групу країн, особливо чутливих до зниження рівня монетизації, аж до негативних наслідків для економіки.
Доведено, що незалежно від рівня розвитку економіки зростання «широкої» грошової маси є чинником, який істотно впливає на зростання ВВП. Незважаючи на те що даний чинник розглядається як необхідний, він не є достатнім для зростання економіки, особливо в період Четвертої промислової революції, коли держава має відігравати більш активну та складну роль у прискоренні національного техніко-технологічного розвитку.
Несмотря на то что влияние денежной массы на инвестиции и ВВП активно исследуется, не все его аспекты достаточно изучены. В частности, сложившаяся в последние годы «новая нормальность» не позволяет использовать классические концепции и модели для формирования эффективной монетарной политики, тем более в специфических условиях эмерджентной экономики, к которой относится Украина. Целью статьи является определение взаимосвязи денежных агрегатов, инвестиций и ВВП в новых условиях посредством анализа временных рядов экономических данных.
Информационной базой исследования является статистика Мирового банка по странам мира с показателями «широких» денег (М3) и валовых инвестиций. Статистический анализ позволил установить, что более 71% рассматриваемых стран показали существенную корреляцию между М3 и валовыми инвестициями. Определено, насколько сила корреляции зависит от уровня социально-экономического развития страны. Для этого на основе метода «ближайших соседей» проведена классификация стран в двухмерном пространстве: по параметрам дохода на душу населения и тесноты связи М2 и инвестиций. Анализ показал, что 79% из всех анализируемых стран оказались в классе с доказуемой высокой корреляцией, причем независимо от уровня их богатства и развития. В том же пространстве признаков выполнен кластерный анализ стран с использованием метода «сдвига среднего». Этот метод позволил с точностью 91% разделить страны на пять кластеров с различными социально-экономическими условиями, а также выделить отдельную группу стран, особенно чувствительных к снижению уровня монетизации, вплоть до самых негативных последствий для экономики.
Доказано, что независимо от уровня развития экономики рост «широкой» денежной массы является фактором, существенно влияющим на рост ВВП. Несмотря на то что этот фактор рассматривается как необходимый, он, тем не менее, не является достаточным для роста экономики, особенно в период Четвертой промышленной революции, когда государство должно играть более активную и сложную роль в ускорении национального технико-технологического развития.
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Money supply impact on investment and GDP: statistical analysis / D.V. Lypnytskyi, P.D. Lypnytska // Економіка промисловості. — 2022. — № 1 (97). — С. 89-102. — Бібліогр.: 28 назв. — англ. |
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–––––––––––––––––––––––––– Економіка промисловості Экономика промышленности ––––––––––––––––––––––
ISSN 1562-109X Econ. promisl. 89
2022, № 1 (97)
УДК 330.55.051+336.748.77:330.322 DOI: http://doi.org/10.15407/econindustry2022.01.089
Denys V. Lypnytskyi,
PhD in Economics, application architect, technical trainer
i-Klass Center LLC
Е-mail: denis.lipnitsky@i-klass.com
https://orcid.org/0000-0002-4616-7936;
Polina D. Lypnytska
Up2Date Learn Online Courses
E-mail: kumpersina@gmail.com
https://orcid.org/0000-0003-1722-1697
MONEY SUPPLY IMPACT ON INVESTMENT AND GDP:
STATISTICAL ANALYSIS
The question of how the changes in money supply influence investment and GDP have been
studied intensively in recent history. However, not all aspects of this impact are sufficiently re-
searched. In particular, the "new normality" (that has evolved recently) limits the use of well-
known classical concepts and models in monetary policy, especially for emerging economies to
which Ukraine belongs. Thus, the subject of this study was to assess the relationship between
monetary aggregates, investment, and GDP by the world economic data analysis using mathemat-
ical statistics.
As the information base for the study, the World Bank official statistics were taken (includ-
ing broad money, gross capital formation, and GDP). More than 71% of all investigated countries
showed a significant correlation between M3 and gross investment. The issue of how the strength
of this relationship depends on the level of socio-economic development was investigated. Clas-
sification of countries was carried out using the “nearest neighbors” method in a two-dimensional
feature space, namely, per capita income and correlation tightness. The analysis showed that 79%
of all countries fall into the class with a proven high correlation. Moreover, their level of wealth
and development was irrelevant.
A cluster analysis of countries was fulfilled in the chosen feature space using the “mean
shift” method. With the help of this method, all countries have been distributed into five clusters
with different socio-economic conditions and an accuracy of 91%. Among them, there was a
group of countries highly sensitive to change in monetization, up to extremely negative economic
impacts.
The study helped to conclude that, regardless of economic development, GDP benefits from
an increase in the money supply. Although this factor is considered necessary, it is nevertheless
not sufficient for economic growth, especially in the time of the fourth industrial revolution, when
the government has to play a more active and complex role in accelerating national technological
development.
Keywords: money supply, investment, GDP, monetization, correlation, cluster analysis.
JEL: G18, G28, C12, C22
Since the beginning of the 20th century,
the world economy has faced two great chal-
lenges – the global financial crisis of 2007-
2008 and the COVID-19 pandemic. To miti-
gate their impact, the world-leading monetary
authorities lowered interest rates to the histo-
rical minimum and took non-traditional
measures. This new monetary policy helped to
maintain financial stability and support busi-
ness activity. However, as a result, the top de-
veloped countries fell into a "liquidity trap"
with interest rates close to zero and unprece-
© D. V. Lypnytskyi, P. D. Lypnytska, 2022
–––––––––––––––––––––––––– Економіка промисловості Economy of Industry ––––––––––––––––––––––––––––––
90 ISSN 1562-109X Econ. promisl.
2022, № 1 (97)
dented public debt raising. Such a policy
means, that the central banks and monetary
authorities directly finance government spend-
ing (the orthodox economic theory forbids it)
via the constant expansion of the monetary
base (Damiano Sandri, 2022). In such circum-
stances, the emerging economies faced new
problems, including a strong need to maintain
economic growth together with a high proba-
bility of increasing exchange rates and im-
ported inflation.
The situation is getting even more com-
plicated since the world is experiencing the
fundamental transformations brought by the
4th Industrial Revolution. Many of its tech-
nologies are still in the initial phase, which
means that further steps would require active
government support (Vishnevsky, 2022), in-
cluding new monetary policy measures. In this
regard, an increase in money supply, long and
cheap liquidity provision might have a posi-
tive impact on investment and real GDP
growth. Whether this is the case and what pre-
conditions are required for a positive scenario,
is a matter of great theoretical and practical
importance.
The question of how the changes in
money supply influence investment and GDP
have been studied intensively in recent histo-
ry. However, not all aspects of this impact
have been sufficiently researched. In particu-
lar, the "new normality", that has evolved in
recent years, limits the use of well-known
classical concepts and models in monetary
policy, especially for emerging economies to
which Ukraine belongs.
In this regard, the subject of the study is
to assess the relationship between monetary
aggregates, investment, and GDP by the world
economic data analysis using mathematical
statistics. The goal is to identify the elements
of this relationship and describe their differ-
ences for various economies at the current
stage of world development.
The article is structured as follows.
First, it presents a brief predecessor studies
overview and substantiates the research meth-
ods. Then the analysis of the relationship be-
tween money supply, investment, and GDP in
different countries is given. The applied statis-
tical methods are used in this part. After dis-
cussing the results, the paper makes infer-
ences, draws conclusions, and suggests direc-
tions for further research.
Among the different goals that econom-
ic policy pursues, the most important one is
GDP growth, which is highly dependent on
many factors. If we put aside for a while the
influence of commodity markets, labor migra-
tion, innovation, etc., then the money supply
will perhaps have the strongest influence on
GDP. Although as shown below, a change in
the money supply directly or indirectly affects
the discarded factors, causing even more
complex effects. And the main transmission
mechanisms of influence are aggregate de-
mand and investments (gross volume and
structure).
The impact of money supply on GDP
growth is non-linear. The rise in the money
supply (if it is uncontrolled) leads to inflation,
which, by creating additional costs for eco-
nomic entities leads to a reduction in working
capital, income, and investment. At the same
time, distortions of information caused by in-
flation provoke systematic errors in making
economic and, especially, investment deci-
sions. As a result, structural problems in the
economy get worse. Negative dynamics of
GDP may happen as a result.
It seems that the containment of emis-
sions and the "sterilization" of the money sup-
ply should curb inflation and promote GDP
growth. But the balance between surplus and
scarcity is very delicate. A lack of money
supply causes no less painful consequences,
than money excess. This issue will be dis-
cussed in more detail below. For now, it suf-
fices to mention that the presence of slight
inflation driven by the growth of monetary
aggregates is beneficial for the economy (Ad-
am, Weber, 2019), and under certain condi-
tions, a negative non-linear relationship be-
tween inflation and unemployment can be ob-
served (Phillips, 1958).
Since interdependencies between GDP
and other macroeconomic factors are com-
plex, economic policy simultaneously uses
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many levers of control. In addition to GDP
growth, they are moderate inflation, control of
unemployment, limiting the budget deficit,
and maintaining an acceptable trade balance.
The multidimensional criterion of success,
which takes into account the above-mentioned
factors, has been called the "magic square". It
usually demonstrates the impossibility of
achieving all four goals simultaneously
(Fig. 1).
Figure 1 – "Magic square"
Source: Kaldor, 1971.
Therefore, economic policy is often
forced to count on higher priority tasks, sacri-
ficing the rest. During a severe economic
downturn, inflation and budget deficits are
usually sacrificed to recover and accelerate
GDP growth. The entire quantitative easing
policy pursued by the United States is proof of
this. Low-interest rates and "helicopter" mon-
ey allowed the US to restore stock indices and
return GDP growth, but at the cost of inflation
rising. The consumer price index in the United
States increased by 2021 to a record level for
40 years – 6,8% (Inflation in the US acceler-
ated to a record since 1982, 2021).
However, as you know, quad licet iovi,
non licet bovi. The financial authorities of
other countries (Russia, China, Brazil, etc.),
on the contrary, have kept the interest rates at
a high level since 2008. Their surge in infla-
tion was mainly caused by non-emission fac-
tors. And despite the measures taken, the can-
cellation of the next stage of quantitative
easing in the leading countries was followed
by the expected outflow of capital from less
developed economies to the USA, the UK,
and Central Europe (Zaiko, 2015). The exter-
nal debt of individual countries like Ukraine,
Turkey, India, and some others increased sig-
nificantly. The monetization of these econo-
mies has suffered a decline. It resulted in a
natural "sterilization" of their finances.
Regardless of its cause, "money hunger"
is considered by many economists no less evil
than uncontrolled inflation (Krugman, 2010).
But despite this, people continue to believe in
inflation targeting as the most useful vaccine
against any economic disease. And the reason
is not only the apparent simplicity of this reci-
pe but its imposition by the world's leading
financial institutions.
Inflation targeting performed through
regulating monetary aggregates and/or dis-
count rates is considered by economists dif-
ferently. The character of their assessment
largely depends on the state of the economy
under study (Stiglitz, 2008). For technologi-
cally and economically developed countries
with huge capital stock, such targeting may
positively impact GDP growth. On the contra-
ry, for less developed countries with low capi-
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talization or suppressed aggregate demand,
statistical data prove the neutrality of the tar-
geting policy or even its negative impact on
GDP.
At the same time, despite the statistical
analysis, the very logic of economic mecha-
nisms suggests that the excessive pressure on
inflation by restraining the money supply
causes a corresponding pressure on demand
and investment. As a counterargument, it is
argued that it will be risky to allow inflation to
rise to 6% and above. Beyond this line, price
volatility, which is difficult to control, begins
(Perevyshina, 2017).
However, even if a “green corridor” is
set within 4-5%, effective targeting is still dif-
ficult to implement. In particular, the macroe-
conomic information required for the regula-
tor is distributed unevenly over time. Prices,
production statistics, budget revenue, and sim-
ilar data come to decision-making centers in
different periods, which causes policy inaccu-
racies (Kartaev, 2017; Stiglitz, 2008, May 6).
Delays in the arrival of information lead tar-
geting to the blind pursuit of an elusive target.
And the most likely consequence of this is the
excessive "sterilization" of the money supply
up to the aforementioned "money hunger".
The negative consequences of long-term
compaction of monetary aggregates are nu-
merous. Some researches show that "money
hunger" is especially aggressive towards the
industries with a complex technological struc-
ture, and a high share of added value (Blinov,
2015). As a result, the first consequence of
money's "evaporation" from the economy is
the primitivization of its structure, which is
obviously the case in Ukraine.
The monetary deficit also leads to a
simplification of the structure of households‟
consumption. The savings, and as a result, in-
vestments are going down. Investment strate-
gies also boil down to the minimum need for
survival, ignoring innovative, high-tech, and,
especially, venture capital assets.
The reduction of high-tech industries
and jobs causes an outflow of labor resources
from the most promising sectors of the econ-
omy. As a result, labor migration may in-
crease, and specifically, the outflow of the
most qualified staff. All these factors, multiply
reinforcing each other, cause multiple effects.
The impact of the real money supply contrac-
tion on the decline in GDP becomes non-
linear. Its rise influence on GDP growth is
also non-linear. But how exactly it works is a
separate question.
Econometric analysis
Problem formulation
S. Blinov (Blinov, 2015, p. 9) describes
the reasons why GDP growth requires not on-
ly recovery but an outstripping growth of the
money supply. According to the author, "line-
ar growth of real GDP requires exponential
growth of real money supply." Among the
reasons for this phenomenon, there is the
structural complexity of the economy. It
means that an increase in money supply leads
first to a rise in the number of transactions
required to recreate (or form) this complex
structure. Only then, to an increase in value-
added, which is only a part of the total cost of
transactions. Thus, figuratively speaking,
monetary resources first fill all the buffers and
channels of the "reclamation system" of the
economy, and only then lead to "fertility".
This somewhat simplified logic ignores
technological development factors and life
cycles of technologies. Which is of strong im-
portance in the time of the 4th Industrial Rev-
olution. Not only an increase in the money
supply and aggregate demand can secure the
growth of breakthrough technologies. It is es-
pecially the truth for the microchips industry,
which is the base of the modern digital econ-
omy. The microchips industry's development
requires many other conditions and actions
that go beyond the scope of the monetary pol-
icy.
Nevertheless, under certain conditions,
the mentioned effects (Blinov, 2015) can take
place. If we consider the state of the Ukrainian
economy against the background of the prob-
lems discussed, we can get a good illustration
of what has been said.
The trend of the monetary aggregate M3
of Ukraine is shown in the chart below in Fig.
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2 (National Bank of Ukraine). Fig. 3 also
shows an increase in the inflation rates and
prices for construction work, which illustrates
the inflation of investment opportunities (Min-
istry of Finance of Ukraine).
Figure 2 – Broad money index (Ukraine)
Source: National Bank of Ukraine.
Figure 3 – Inflation and construction works
price base indexes (Ukraine)
Source: Ministry of Finance of Ukraine.
From the illustrations above it is obvi-
ous, that the fall in the real money supply was
about 10% between 2015 and 2020. Against
the background of a long-term decline in real
M3, its notable growth happened only in re-
cent years (about 20% in 2020), while the in-
flation rate was much higher throughout the
entire period under consideration.
The correspondence between the money
supply and the productivity of the economy is
usually measured by the monetization coeffi-
cient (Pshinko, Myamlin, 2012):
Km = М / GDP,
where M – monetary supply aggregate, M2 or
M3 (broad money);
GDP – gross domestic product.
Following the formula, monetization
coefficients have been calculated for Ukraini-
an and several foreign economies. The results
are shown in Table. 1.
Table 1 – Global monetization coefficients (2020), %
Ukraine Russia Japan India China USA Brazil
44 60 258 73 205 95 96
Source: compiled by authors.
It is worth mentioning, that the GDP
boosting by expanding the money supply is a
task far from having a simple solution for a
particular economy. It is obvious that the
monetization of the Ukrainian economy is in-
sufficient for long-term and productive eco-
nomic growth, even more, for the increasing
complexity of the domestic economy. But the
question remains: What coefficient might be
considered sufficient?
Take Japan and China, for example,
where monetization coefficients are 258% and
205%, respectively. Both of these countries do
not have a liquidity crisis. However, it is only
in China where the cash flow turns the "mill-
stones" of economic growth. In Japan, the
problems, that piled up in the economy and
finance during the "lost decade" (Fumio
Hayashi, 2001), inhibit now investment activi-
ty even in presence of a significant increase in
liquidity. China, whose investment channels
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are more straightforward than its neighbor's, is
showing more progress. However, China also
runs the risk of facing similar difficulties in
the future due to accumulating "bad debts"
(China's potential loss from NPLs estimated at
$1 trillion, 2016).
To what extent should monetary aggre-
gates be built up without excessive inflation?
F. Kartaev, says that the level of harmless in-
flation can be "a little more than 10% for de-
veloping economies" (Kartaev, 2019). Then,
he insists that inflation must be kept substan-
tially lower even for such countries. The au-
thor favors inflation targeting over money
supply expansion, insisting that the long-term
impact on GDP growth from the first is more
robust than from the second. Thus, the opin-
ions of F. Kartaev and S. Blinov are opposed.
Some authors study the differences in
monetary policy and its impact on inflation
and GDP growth for countries with distinct
economic or socio-cultural conditions. F. Kar-
taev explores the countries with different eth-
nolinguistic diversity (Kartaev, 2018).
O. Klochkova analyzes inflation in countries
with different levels of economic freedom
(Klochkova, 2017). However, these studies do
not provide any universal conclusions.
Thus, the following points were taken as
a theoretical basis for the study: firstly, the
hypothesis concerning the positive impact of
the expansion of the real money supply and
monetization of the economy on the growth of
investment and, as a result, GDP growth. Sec-
ondly, the alleged ambiguity of the criteria
and approaches for stimulating GDP growth
by "calming down" exchange rates and infla-
tion. Thirdly, there is a wide variety of econ-
omies of individual countries, which highly
differ in sectoral structure, trade balance, debt
burden, global cooperation, etc. This diversity,
however, is desirable to be reduced to certain
patterns. Taking into account the foregoing
facts and hypotheses, a statistical analysis of
the World Bank data time series was conduct-
ed (the World Bank, 2020). Its results are
shown and explained below.
Relationship analysis: the real money
supply and investment
As the information base for the study,
the official statistics of the World Bank were
taken (including M3 – broad money, gross
capital formation, GDP, and population for
individual countries) for the period 2006–
2020. The period was chosen deliberately
from the year before the real-estate bubble
explosion to the year when the "COVID-19"
crisis began. The influence of the latter one on
the world economy has not yet ceased, and in
certain markets, for example, electronics, it is
only increasing these days (Kelion, 2021, Feb-
ruary 5).
The calculations were accomplished in
Python programming language using the sta-
tistics and machine learning library (Scikit-
learn). The code and its execution results are
given as an interactive notebook and are
available at the following link (Lypnytska,
GitHub).
By the authors cited above (Stiglitz,
2008; Blinov, 2015) the relationship between
monetary aggregates and GDP is considered
to be confirmed. Investments are acknow-
ledged as an intermediate agent for such influ-
ence. However, the impact of monetization on
the investment itself has not been sufficiently
and quantitively studied by them. Therefore,
as a complement to the above-mentioned
works, the impact of M3 money aggregate on
gross capital formation was studied (to isolate
the investment influence on GDP growth and
examine it in its pure form).
The relationship between broad money
and investment was measured by computing
the Pearson correlation coefficients (All of
Statistics, 2004) for all countries from the
World Bank report. Then the empirical
threshold for the Pearson coefficient was set at
65%. This threshold helped to separate the
countries with a proven relationship between
broad money and investment activity. Table 2
below shows a fragment of the top list, sorted
by the correlation strength.
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Table 2 – TOP countries by the correlation between М3 and gross capital formation
(2020)
Country Correlation coefficients GDP per capita, USD
Kazakhstan 0,956351 26 352
Sweden 0,956661 52 850
Peru 0,958855 12 854
Cambodia 0,962369 4 389
Turkey 0.963198 28 385
Kyrgyzstan 0,971727 5 258
S.Korea 0,974348 42 719
India 0,983017 6 717
China 0,992802 16 411
USA 0,869843 60 162
UK 0,835022 41 627
Source: compiled by authors.
The list turned out to be quite heteroge-
neous. In addition to India, China, the United
States, and the UK, it includes some countries
from a completely different division, like Peru
and Cambodia. However, 71% of all
investigated countries showed a significant
relationship between broad money and
gross investment. The histogram of Pearson
correlation coefficients (Fig. 4) indicates that
most countries naturally fall into the "core",
that is, a group with the highest degree of cor-
relation. And if the observation of time series
for individual countries itself only displays a
probable similarity in M3 and gross invest-
ment tendencies (Fig. 5), then regression anal-
ysis proves the existence of a significant rela-
tionship between them.
Figure 4 – Histogram of correlation between
broad money and gross capital
formation
Source: compiled by authors.
Figure 5 – Broad money and gross capital
formation (Turkey)
Source: compiled by authors.
The Turkey example below illustrates
this relationship, including the linear regres-
sion equation shown in Fig. 6 (the coefficient
of determination equals 71%). This judgment
applies equally to all countries that have
passed the determined threshold of 65% for
the Pearson correlation coefficient. Thus, the
relationship between the two factors is proven.
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Further analysis and discussion
It is believed that the influence of the
money supply on investment and via invest-
ment on GDP depends significantly on the
level of the country's economic development.
In less developed and poor countries, the ex-
pansion of the money supply can only cause
excessive inflation and thus harm the GDP.
Thus, the practicality of inflation targeting is
supposed to be confirmed.
To clarify this hypothesis, the next stage
of the study was accomplished. The "nearest
neighbors" were chosen as an analytical
method (Hastie, 2017). The classification of
countries was carried out using it. As a result,
the countries were separated in a two-
dimensional feature space. Namely, per capita
income (1) and the tightness (Pearson coeffi-
cient) of the relationship between broad mon-
ey and gross capital formation (2). The out-
comes of the classification are shown in
Fig. 7.
The division of countries into two
groups was done with 91% accuracy. The ful-
filled statistical analysis (together with infer-
ences drawn) partly conflicts with the opin-
ions of the above-mentioned authors. As ex-
pected, countries with the highest GDP per
capita ended up in a strongly correlated class
(blue labels in Fig. 7).
Figure 6 – Regression analysis (Turkey)
Source: compiled by authors.
Figure 7 – "Nearest neighbors" classification
Source: compiled by authors.
However, most poor countries also be-
long to that class. The figure shows them be-
longing to the dense cluster of blue dots in the
lower right corner. At the same time, some
middle-income countries (as well as poor
ones) are found to belong to the class with a
low correlation between broad money and
gross investment. Therefore, we can talk about
the incorrectness of the hypothesis that the
growth of the money supply has a positive
effect on investment and GDP growth only for
developed and rich countries.
The vast majority of the analyzed coun-
tries ended up in the class with a provable cor-
relation regardless of their wealth and devel-
opment. The share of such countries consti-
tutes 79%. On the contrary, among the re-
maining 21%, there are countries with pre-
dominantly middle and low per capita income.
To expand the study, countries cluster
analysis was executed in the same feature
space. These heterogeneous indicators (GDP
per capita and correlation coefficient) were
also normalized, as in the classification meth-
od shown above. The “mean shift” method
was applied for this cluster analysis (Coman-
iciu, Meer, 2002). The internal parameters of
the "mean shift" method were selected based
on cross-validation, maximizing the accuracy
of separating the countries in the feature
space. The results of the analysis are illustrat-
ed in Fig. 8. The countries were divided into
five clusters, marked in the figure in different
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colors (with the centers of the clusters marked
with larger circles).
Figure 8 – "Mean shift" clustering
Source: compiled by authors.
The analysis showed that the largest
group, marked in blue in the lower right cor-
ner, included 78% of the total number of
countries. And these are precisely the coun-
tries with a relatively low level of GDP per
capita but at the same time a high correlation
between broad money and investment. For
such countries, the increase in monetization is
strongly linked with GDP growth.
Economic logic itself suggests that the
low savings ratio and weak financial institu-
tions in such countries make them very sus-
ceptible to money supply decrease and decline
in monetization up to very negative conse-
quences for their economy. These countries'
group includes India, Turkey, China, Brazil,
Mexico, and several other Latin American
countries.
Rich countries in the upper right quad-
rant of the figure (consisting of two relatively
small clusters) have shown, as expected, a
strong positive relationship between the broad
money supply and investment growth. In con-
trast, the green cluster (low correlation and
low per capita income) in the lower-left quad-
rant predictably includes countries ravaged by
war or poverty, such as Ethiopia and Libya.
However, there is also a small group of
countries where the relationship between M3
and gross investment does not depend on
wealth. They are represented by the red cluster
in the figure. Among the countries in this
group, there are Japan, Switzerland, and Pan-
ama. These are three clear examples of how
different economic destinies brought them to
this neighborhood. Japan is still unable to res-
urrect the economy and the financial institu-
tions' normal functioning after the “lost dec-
ade”. The other two countries are offshore ha-
vens whose economies are weakly dependent
on domestic monetary policy.
Conclusions. Money is not just a "blan-
ket" thrown over the economy to warm it up.
They can and do work, but only with varying
degrees of success. Monetary policy is the tool
that has helped overcome two global crises,
but it also created new problems, namely, un-
controlled price increases and "financial bub-
bles" inflating.
As shown by the statistical analysis,
money is important, but it is not always the
decisive factor for the growth of investment
and GDP. Moreover (and it should be empha-
sized), this conclusion does not directly de-
pend on the level of economic development.
In most world countries (both developed and
developing), a strong relationship exists be-
tween real money supply and investment. This
relationship leads to GDP growth. But at the
same time, there are certain rich economies,
where the growth of the real money supply is
weakly related to the increase of investments.
There are some cases, where the dependence
is almost functional (but until the possibilities
of extensive growth are exhausted).
Despite the importance of monetary var-
iables, key factors that influence the "real
money supply-investment-GDP" chain should
be investigated outside the monetary sphere.
The conclusion has long been known but is
relatively new for the current conditions. The
sustained expansion of the monetary base and
the growth of the real money supply do mat-
ter. But they cannot by themselves solve the
fundamental problems of modernizing eco-
nomic institutions and bridging technological
gaps. Concerning the Ukrainian economy, the
regulator has to maintain a stable growth of
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98 ISSN 1562-109X Econ. promisl.
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the real money supply. It is essential for solv-
ing the accumulated problems, providing that
the government creates preconditions for ac-
celerating the national technical and techno-
logical development and raising the general
level of the economy. Such complex rules for
economic policy should be considered a prior-
ity for further research in these subject areas.
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Денис Володимирович Липницький,
канд. екон. наук, архітектор додатків, технічний тренер
i-Klass, навчальний центр
вул. Шота Руставелі, 39/41, м. Київ, 01033, Україна
E-mail: d.lipnitsky@i-klass.com
https://orcid.org/0000-0002-4616-7936;
Поліна Денисівна Липницька
навчальний онлайн центр «Up2Date»
E-mail: kumpersina@gmail.com
https://orcid.org/0000-0003-1722-1697
ВПЛИВ ГРОШОВОЇ МАСИ НА ІНВЕСТИЦІЇ ТА ВВП:
СТАТИСТИЧНИЙ АНАЛІЗ
Незважаючи на те що вплив грошової маси на інвестиції та ВВП активно досліджу-
ється, не всі аспекти цього процесу вивчені достатньою мірою. Це, зокрема, пов'язано з
«новою нормальністю», яка склалася останнім часом. Її особливості не дозволяють вико-
https://doi.org/10.1006/redy.2001.0149
https://doi.org/10.1006/redy.2001.0149
https://econpapers.repec.org/article/ecjeconjl/
https://orcid.org/0000-0003-1722-1697
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ISSN 1562-109X Econ. promisl. 101
2022, № 1 (97)
ристовувати класичні концепції та моделі для формування ефективної монетарної політи-
ки, тим більше у специфічних умовах емерджентної економіки, до якої належить Україна.
Метою статті є визначення взаємозв'язку грошових агрегатів, інвестицій та ВВП у нових
умовах шляхом аналізу часових рядів економічних даних.
Інформаційною базою дослідження є статистика Світового банку за країнами світу з
показниками «широких» грошей (М3) і валових інвестицій. Статистичний аналіз дозволив
встановити, що понад 71% розглянутих країн мають суттєву кореляцію між М3 та валови-
ми інвестиціями. Визначено, наскільки сила кореляції залежить від рівня соціально-
економічного розвитку. Для цього на основі методу «найближчих сусідів» здійснено кла-
сифікацію країн у двовимірному просторі: за параметрами доходу на душу населення і
щільності зв'язку М2 та інвестицій. Аналіз свідчить, що 79% з усіх розглянутих країн
опинилися в класі з доведеною високою кореляцією, причому незалежно від рівня їхнього
багатства та розвитку. У цьому ж просторі ознак виконано кластерний аналіз країн із вико-
ристанням методу «зрушення середнього», який дозволив із точністю 91% розподілити
країни на п'ять кластерів із різними соціально-економічними умовами, а також виокремити
групу країн, особливо чутливих до зниження рівня монетизації, аж до негативних наслідків
для економіки.
Доведено, що незалежно від рівня розвитку економіки зростання «широкої» грошової
маси є чинником, який істотно впливає на зростання ВВП. Незважаючи на те що даний
чинник розглядається як необхідний, він не є достатнім для зростання економіки, особливо
в період Четвертої промислової революції, коли держава має відігравати більш активну та
складну роль у прискоренні національного техніко-технологічного розвитку.
Ключові слова: грошова маса, інвестиції, ВВП, монетизація, кореляція, кластерний
аналіз.
JEL: G18, G28, C12, C22
Денис Владимирович Липницкий,
канд. экон. наук, архитектор приложений, технический тренер
i-Klass, учебный центр
ул. Шота Руставели, 39/41, г. Киев, 01033, Украина
E-mail:d.lipnitsky@i-klass.com
https://orcid.org/0000-0002-4616-7936;
Полина Денисовна Липницкая
учебный онлайн центр «Up2Date»
E-mail:kumpersina@gmail.com
https://orcid.org/0000-0003-1722-1697
ВЛИЯНИЕ ДЕНЕЖНОЙ МАССЫ НА ИНВЕСТИЦИИ И ВВП:
СТАТИСТИЧЕСКИЙ АНАЛИЗ
Несмотря на то что влияние денежной массы на инвестиции и ВВП активно исследу-
ется, не все его аспекты достаточно изучены. В частности, сложившаяся в последние годы
«новая нормальность» не позволяет использовать классические концепции и модели для
формирования эффективной монетарной политики, тем более в специфических условиях
эмерджентной экономики, к которой относится Украина. Целью статьи является определе-
ние взаимосвязи денежных агрегатов, инвестиций и ВВП в новых условиях посредством
анализа временных рядов экономических данных.
Информационной базой исследования является статистика Мирового банка по стра-
нам мира с показателями «широких» денег (М3) и валовых инвестиций. Статистический
анализ позволил установить, что более 71% рассматриваемых стран показали существен-
https://orcid.org/0000-0002-4616-7936
https://orcid.org/0000-0003-1722-1697
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102 ISSN 1562-109X Econ. promisl.
2022, № 1 (97)
ную корреляцию между М3 и валовыми инвестициями. Определено, насколько сила корре-
ляции зависит от уровня социально-экономического развития страны. Для этого на основе
метода «ближайших соседей» проведена классификация стран в двухмерном пространстве:
по параметрам дохода на душу населения и тесноты связи М2 и инвестиций. Анализ пока-
зал, что 79% из всех анализируемых стран оказались в классе с доказуемой высокой корре-
ляцией, причем независимо от уровня их богатства и развития. В том же пространстве при-
знаков выполнен кластерный анализ стран с использованием метода «сдвига среднего».
Этот метод позволил с точностью 91% разделить страны на пять кластеров с различными
социально-экономическими условиями, а также выделить отдельную группу стран, осо-
бенно чувствительных к снижению уровня монетизации, вплоть до самых негативных по-
следствий для экономики.
Доказано, что независимо от уровня развития экономики рост «широкой» денежной
массы является фактором, существенно влияющим на рост ВВП. Несмотря на то что этот
фактор рассматривается как необходимый, он, тем не менее, не является достаточным для
роста экономики, особенно в период Четвертой промышленной революции, когда государ-
ство должно играть более активную и сложную роль в ускорении национального технико-
технологического развития.
Ключевые слова: денежная масса, инвестиции, ВВП, монетизация, корреляция, кла-
стерный анализ.
JEL: G18, G28, C12, C22
Формат цитування:
Lypnytskyi D. V., Lypnytska P. D. (2022). Money supply impact on investment and GDP:
statistical analysis. Економіка промисловості. № 1 (97). С. 89-102. DOI: http://doi.org/10.
15407/econindustry 2022.01.089
Lypnytskyi, D. V., & Lypnytska, P. D. (2022). Money supply impact on investment and
GDP: statistical analysis. Econ. promisl., 1 (97), рр. 89-102. DOI: http://doi.org/10.15407/
econindustry2022.01.089
Надійшла до редакції 21.01.2022 р.
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