Another look at our Global Monetary Conditions Monitor – the case of Hungary

Yesterday, we wrote a short post on Israeli monetary policy and linked to one page on Israeli monetary conditions to give an example of how the “country pages” in our – Markets & Money Advisory – new monthly flagship publication Global Monetary Conditions Monitor (GMCM) will look like. We expect to publish the first edition in March – coinciding with the launch of our new website.

So what is the GMCM? Overall one can say it is our attempt to create a measure of monetary conditions for investors and policy makers alike so they can track global monetary developments.

It will not be a forecasting publication as such, but obviously investors can use the publication to make informed decisions on investments as there certainly is no doubt that changes in monetary conditions have a significant impact on changes asset prices.

The overall structure in GMCM will be the following.

First of all, the firsts page (5-6 pages) will discuss global monetary developments with a particular focus on what we call the Global Monetary Superpowers – the Federal Reserve, PBoC, ECB, BoJ, BoE and SNB. The discussion will be based both on our new composite indicator of monetary conditions (see more below) in each of the “Superpowers” and on what the financial markets are telling us about monetary conditions and expectations for monetary policy.

This will be followed by a monthly “special topic” (1-2 pages). That could for example be about the relationship between our measure(s) of global monetary conditions and the development in equity prices or commodity prices or we could decide to zoom in on monetary policy developments in a given country that we find of particular interest.

Finally we will “country pages” for each of the 25 countries covered in the publication. The countries are the following:

Czech Republic
Euro zone
New Zealand
South Africa
South Korea
United Kingdom
United States

We expect to expand the number of countries to more than 30 countries in the coming months based on client requests and interests. The main focus is on countries with floating exchange rates with inflation targets or similar nominal targets. If  you are missing a country you are terribly interested in please let us know.

Each country page will consist of six graphs.

The first graph will be a graph for the development in our composite indicator for monetary conditions in that given country. This indicator is calibrated so that a value of zero indicates that the central bank is likely to hit its inflation target in the medium-term (2-3 years).

A score below (above) zero indicates that the central bank will undershoot (overshoot) its inflation target and hence is keeping monetary conditions too tight (easy). Overall, we define monetary conditions to be “broadly neutral” when the indicator is between -0.5 and +0.5.

The second graph will be a graph with an inflation forecast for the given country three years ahead. The inflation forecasts is based on composite indicator for the monetary conditions (assuming no supply side shocks).

In addition to that there will be four graphs on the sub-indicators on which the composite indicator is constructed.

These indicators are the following: Broad money supply growth (typically M2 or M2), nominal demand growth (typically nominal GDP or nominal consumption expenditure), exchange rate developments and finally the key policy interest rates.

For each of these these indicators we calculate a level or a growth rate, which we think would be consistent with the given central bank’s inflation target. Based on this we calculate a gap between the policy-consistent growth rate of for example the money supply and the actual growth rate of the money supply. This gap we use as input into our composite indicator.

The Hungary central bank is on track to (nearly) hit its 3% inflation target

Yesterday we showed an example of how such a country page in the GMCM would look like. Yesterday’s example was Israel because we had a Israeli monetary policy decision yesterday. If you missed it yesterday have a look at the country page for Bank of Israel here.

Today we have another monetary policy decision in Hungary. Therefore we think it is suiting to use Hungary as the next example of a country page.

This is how it looks.


If you want a closer look you can also see it in PDF here.

We are already getting a lot of feedback on the GMCM, but would be very happy to hear what you think so we can incorporate comments and ideas before the launch of the GMCM.

The Global Monetary Conditions Monitor will be priced at EUR 2,000 for a 12-month subscription. Furthermore, discounts can be negotiated for more than one subscription or as part of a general advisory deal.

If you want to hear more about Global Monetary Conditions Monitor please contact us by mail on (Lars Christensen) or (Laurids Rising).

See more on the Global Monetary Conditions Monitor:

M&M Advisory to launch new publication on Global Monetary Conditions

Our Global Monetary Conditions Monitor – what we write about Bank of Israel


The Euro – A Monetary Strangulation Mechanism

In my previous post I claimed that the ‘Greek crisis’ essentially is not about Greece, but rather that the crisis is a symptom of a bigger problem namely the euro itself.

Furthermore, I claimed that had it not been for the euro we would not have had to have massive bailouts of countries and we would not have been in a seven years of recession in the euro zone and unemployment would have been (much) lower if we had had floating exchange rates in across Europe instead of what we could call the Monetary Strangulation Mechanism (MSM).

It is of course impossible to say how the world would have looked had we had floating exchange rates instead of the MSM. However, luckily not all countries in Europe have joined the euro and the economic performance of these countries might give us a hint about how things could have been if we had never introduced the euro.

So I have looked at the growth performance of the euro countries as well as on the European countries, which have had floating (or quasi-floating) exchange rates to compare ‘peggers’ with ‘floaters’.

My sample is the euro countries and the countries with fixed exchange rates against the euro (Bulgaria and Denmark) and countries with floating exchange rates in the EU – the UK, Sweden, Poland, Hungary, the Czech Republic and Romania. Furthermore, I have included Switzerland as well as the EEA countriesNorway and Iceland (all with floating exchange rates). Finally I have included Greece’s neighbour Turkey, which also has a floating exchange rate.

In all 31 European countries – all very different. Some countries are political dysfunctional and struggling with corruption (for example Romania or Turkey), while others are normally seen as relatively efficient economies with well-functioning labour and product markets and strong external balance and sound public finances like Denmark, Finland and the Netherland.

Overall we can differentiate between two groups of countries – euro countries and euro peggers (the ‘red countries’) and the countries with more or less floating exchange rates (the ‘green countries’).

The graph below shows the growth performance for these two groups of European countries in the period from 2007 (the year prior to the crisis hit) to 2015.

floaters peggers RGDP20072015 A

The difference is striking – among the 21 euro countries (including the two euro peggers) nearly half (10) of the countries today have lower real GDP levels than in 2007, while all of the floaters today have higher real GDP levels than in 2007.

Even Iceland, which had a major banking collapse in 2008 and the always politically dysfunctionally and highly indebted Hungary (both with floating exchange rates) have outgrown the majority of euro countries (and euro peggers).

In fact these two countries – the two slowest growing floaters – have outgrown the Netherlands, Denmark and Finland – countries which are always seen as examples of reform-oriented countries with über prudent policies and strong external balances and healthy public finances.

If we look at a simple median of the growth rates of real GDP from 2007 until 2015 the floaters have significantly outgrown the euro countries by a factor of five (7.9% versus 1.5%). Even if we disregard the three fastest floaters (Turkey, Romania and Poland) the floaters still massively outperform the euro countries (6.5% versus 1.5%).

The crisis would have long been over had the euro not been introduced  

To me there can be no doubt – the massive growth outperformance for floaters relative to the euro countries is no coincidence. The euro has been a Monetary Strangulation Mechanism and had we not had the euro the crisis in Europe would likely long ago have been over. In fact the crisis is essentially over for most of the ‘floaters’.

We can debate why the euro has been such a growth killing machine – and I will look closer into that in coming posts – but there is no doubt that the crisis in Europe today has been caused by the euro itself rather than the mismanagement of individual economies.

PS I am not claiming the structural factors are not important and I do not claim that all of the floaters have had great monetary policies. The only thing I claim is the the main factor for the underperformance of the euro countries is the euro itself.

PPS one could argue that the German ‘D-mark’ is freely floating and all other euro countries essentially are pegged to the ‘D-mark’ and that this is the reason for Germany’s significant growth outperformance relative to most of the other euro countries.

Update: With this post I have tried to demonstrate that the euro does not allow nominal adjustments for individual euro countries and asymmetrical shocks therefore will have negative effects. I am not making an argument about the long-term growth outlook for individual euro countries and I am not arguing that the euro zone forever will be doomed to low growth. The focus is on how the euro area has coped with the 2008 shock and the the aftermath. However, some have asked how my graph would look if you go back to 2000. Tim Lee has done the work for me – and you will see it doesn’t make much of a difference to the overall results. See here.

Update II: The euro is not only a Monetary Strangulation Mechanism, but also a Fiscal Strangulation Mechanism.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

Monetary disorder in Central Europe (and some supply side problems)

Last week we got GDP numbers for Q2 in both the Czech Republic and Hungary. Both countries plunged deeper into recession and as it is the case in most other countries in Europe the cause of the misery is monetary disorder. This is documented in two news pieces of research. One on Hungary by Steve Hanke and one the Czech Republic by myself.

Both pieces of research are actually more traditional monetarist in nature than market monetarist as the focus in both papers are on the lackluster growth in the broad money supply rather than on nominal GDP or on market pricing. However, the same analysis could easily have been conducted by looking at nominal GDP rather than the money supply.

Even though the two countries are similar in many ways – population size (around 10 million), economic development (transitional economies, middle income economies) and monetary policy regimes (inflation targeting and floating exchange rates) – there are also many differences such as the level of indebtedness (Hungary is high indebted and the Czech Republic have low levels of public and private debt).

I think both countries are highly interesting in terms of understanding the present global crisis. The Czech Republic is in a deep recession and is showing no signs of recovery and seems to be caught in a disinflationary trap. While many argue that the present global crisis is a “balance sheet recession” or a natural hangover after a too wild party that can hardly be argued for the Czech Republic. The country has quite low levels of private and public debt and the banking sector is quite healthy compared to most European economies. So it is hard to argue that the Czech recession is the result of too much debt or a bursting property market bubble. There is really only one cause: A failed monetary policy. I try to document that in the paper I have written in my day-job as head of Emerging Markets research at Danske Bank. Read the paper “Time for the CNB to take bold action” here.

I have for some time seen Hungary as the odd man out in Europe as Hungary’s main problem at the moment in my view is not monetary, but rather a deeper structural problem. Hungary has basically not seen any economic growth since 2006 and despite of that inflation has continued to run well above the Hungarian central bank’s inflation target of 3%. This to me is an indication of significant supply side problems in the Hungarian economy. The main supply side problem in Hungary is massive political uncertainty and a highly erratic conduct of economic policy. Hence, political uncertainty has dominated all economic decisions in Hungary for at least a decade. Hungary is probably the best example in Europe of what Robert Higgs has called “regime uncertainty”. Regime uncertainty basically mean that political and institutional uncertainty – such as uncertainty about tax rules – hampers investments and general entrepreneurial activity and therefore lowers productivity growth. Regime uncertainty therefore is a supply side phenomena. I strongly believe that this is at the core of Hungary’s lack of growth in that last 6 years. That said, I also agree that particular since 2010 monetary conditions have become tighter in Hungary and the monetary contraction has become especially nasty in the last six months of so.

In his new piece at Cato@Liberty Steve Hanke discusses particular the monetary developments in Hungary in the last couple of quarters. I especially like Steve’s discussion of the policy mix in Hungary – that is fiscal policy versus monetary policy:

“When monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy – money dominates. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.

In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was super-austere – the most tight-fisted president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record.”

This is of course is two examples of the so-called Sumner critique, which I discussed in recent post on German monetary and fiscal policy after the German reunification.

I agree with Steve – the reason for lack of growth in the Hungarian economy is not due to fiscal tightening. It is due to supply side problems – massive regime uncertainty – and recently also due to an unwarranted tightening of monetary conditions.

So yes, the recent drop in economic activity in both the Czech Republic and Hungary is certainty due to a renewed monetary contraction, but while I think the “fix” is it pretty simple for the Czech Republic (ease monetary policy aggressively and soon) I am more skeptical that monetary easing alone will provide a lot of longer lasting help for the Hungarian economy. Hungary desperately needs to improve the general investor climate and implement real supply side reforms and most of all there is a need to reduce regime uncertainty. One might add that the tight monetary conditions in the Czech Republic likely is also creating supply side problems as the Czech government has reacted to the deterioration of public finances caused by low growth by sharply increasing taxes. Supply side problems and tight monetary policy is hardly a combination that gets you out of recession.

%d bloggers like this: