Money and inflation

MINISTRY OF EDUCATION AND SCIENCE OF REPUBLIC OF KAZAKHSTAN

                   T.RYSKULOV'S KAZAKH ECONOMIC UNIVERSITY

FACULTY OF"INTERNATIONAL EDUCATIONAL PROGRAMS"/ FINANCE

 

 

 

 

 

 

                                                  COURSE WORK

 

                                      THEME: MONEY AND INFLATION

 

 

 

 

 

 

 

                                                        Author: Muratkhanuly D., Finance-241

                                       

 

 

 

 

 

 

                                                             Republic of Kazakhstan

                                                   Almaty - 2012

Plan:

Introduction........................................................................................................3

I. The role of money in economics and its influence on inflation processes

1.1 The essence and functions of money............................................................5

1.2 Types of money............................................................................................6

1.3 Quantity theory of money.............................................................................8

II. Inflation: the essence, reasons and methods   of anti-inflationary regulations

2.1 The essence and reasons of inflation processes............................................9

2.2 Money credit politics of  National Bank as a basic instrument of anti-inflationary processes........................................................................................10

III.  Analysis of inflationary processes in the Republic of Kazakhstan

3.1 Statistical data of inflation dynamics from 2009 to 2011...........................14

3.2 Monetary aggregates as indicators of money circulation...........................18

IV. Problems and ways to improve the mechanisms of money circulation and inflation processes dependence regulation

4.1 Problems.......................................................................................................23

4.2 Ways to improve..........................................................................................26

Conclusion..........................................................................................................32

List of used literature

 

 

 

 

 

 

 

INTRODUCTION

In the  course paper we will consider the interaction of such important economic concepts as the theory of money and inflation.

It is generally accepted definition of inflation as a process of devaluation of money, which happens due to the overflow channels of circulation funds and prices increase. However, this definition cannot be considered complete.

From 60-ies to 70-ies the interpretation of inflation as a complex multifactorial phenomenon, which characterizes the violation of the reproduction process, and inherent in the economy, which uses a paper-money circulation, is being approved. Inflation is seen primarily in the form of higher prices, as well as in the form of the relative appreciation of gold and foreign exchange. In the Western theory of inflation begins to penetrate the ideas of the theory of prices, pushing the previously prevailing theory of money.

Inflation - the process of money depreciation, which manifests itself in the form of rising prices for goods and services that is not caused by an increase in their quality.

Inflation is caused, above all, by an overflow of channels of monetary circulation with excess money supply in the absence of an adequate increase in the commodity mass. Inflation causes underestimation of the real value of the property, the risk of accumulation of depreciating money, the prevalence of short-term transactions, impairment income businesses and households. At the same time, inflation is beneficial to exporters, the debtors that return non-indexed debts, banks that pay low interest on deposits, the state, preserving the level of benefits without regard to price increases.

The most common, the traditional definition of inflation - the overflow channels of circulation money supply in excess of the needs of trade, which causes the depreciation of the currency and, accordingly, the increase in commodity prices.

In some cases, the rise of prices regardless inflationary processes is possible. Such situation occurs when general conditions of reproduction are changing, resulting in an increase of production costs. For example, there is a rise in the cost of raw materials due to the worsening conditions of its mining, moreover increase of product quality requires additional labor costs, etc.

The inflationary process is associated with the rise of prices, which is not directly caused by the increase of production costs. Inflation is the result of macroeconomic instability, when aggregate demand exceeds aggregate supply.

The modern interpretation of the price includes a number of elements, each of which seeks to explain the certain factors of pricing formation which are connected with the formation of consumer demand; supply of goods and services; by supply and demand ratio depending on the different forms of markets; the formation of prices of production factors.

Thus, the above implies that the chosen theme of the course work is highly relevant and certain research of  problems and ways to improve the mechanisms of money circulation and inflation processes dependence regulation have to be studied.

The object of the course work is inflationary processes in the Republic of Kazakhstan.

The subject of the work is National Bank's activity in the sphere of money-credit politics.

The aim of this paper is to examine the effect of money supply on inflationary processes in the Republic of Kazakhstan.

The objectives of the survey are as follows:

1. to define the mechanisms of inflationary processes regulation;
2. to consider matters of state anti-inflation policy;
3. identify the problems of inflation and improving the anti-inflation policy;

 

 

 

 

I. The role of money in economics and its influence on inflation processes

1.1 The essence and functions of money

Money - this is the only product that is used exclusively to get rid of him. Money itself does not provide any benefits, they are only a means to get goods and services. Money - is an international language of the entire world market, it drives the whole cycle of resources and goods. Essence, functions and role of money in the global trade have a tremendous impact on the formation and development of the economy as a whole and in individual countries.

The main property of money - the absolute liquidity.

Liquidity - a measure of how quickly an asset can be exchanged for cash.

The monetary system can not exist without money. It covers all financial relationships that develop in a particular society.

The essence of money is revealed in five functions:

• measure of value
• means of circulation
• means of payment
• means of savings and accumulation
• world money

   Measure the value generated during the formation of prices, it determines the value of a commodity, which is measured in money.

    Medium of exchange. Monetary expression of value of goods does not mean its implementation. Must be exchanged. Money - the intermediaries in the exchange from the beginning of the transaction  prior to its completion. During the prevalence of trafficking in money mainly acted as a medium of exchange, after the onset of the credit and economic development to the fore a means of payment function, which includes a medium of exchange function and the function is transformed into a means of payment. This is facilitated by the use of plastic cards and other electronic payment instruments that allow pay by wire transfer from your bank account, as well as the implementation of the wholesale and retail purchases.

Means of payment - the time of payment is not equal to the time of payment, the goods sold on credit with deferred payment

Means of accumulation - a cash reserve (account balances, gold and currency reserves). The money, which function as storage, are involved in the formation, distribution, redistribution of national income, education savings.

    World money is used in international payments.

  In modern developed economy, there are three functions of money - a measure of value, means of storage and means of payment and medium of exchange is in very small amounts.

 

1.2 Types of money

Money can be described as a token which is used in our society to settle debts and to pay for the services and commodities which are provided to us. In other words, money is the medium of exchange in our society which has also been accepted by the law.

The main functions of money are distinguished as:

• a medium of exchange,
• a unit of account,
• a store of value and occasionally, a standard of deferred payment.

There are several kinds of money varying in liability and strength. The society has modified the money at different times and in this way several types of money are introduced. When there was ample availability of metals, metal money came into existence later it was substituted by the paper money. At different times, several commodities were used as the medium of exchange.

So, it can be said that according to the needs and availability of means, the kinds of money has changed.

Some of the major types of money are:

 

Commodity Money:

Whenever any commodity is used for the exchange purpose, the commodity becomes equivalent to the money and is called commodity money. There are certain types of commodity, which are used as the commodity money. Among these, there are several precious metals like gold, silver, copper and many more. Again, in many parts of the world, seashells (also known as cowrie shells), tobacco and many other items were in use as a type of money & medium of exchange.

Fiat Money:

The word fiat means the "command of the sovereign. It is the type of money that is issued by the command of the sovereign. The paper money is generally called as the fiat money. This type of money forms a monetary standard. It has been made mandatory by law to accept the fiat money, as an exchange medium, whenever it is offered to anyone.

Fiduciary Money:

Today's monetary system is highly fiduciary. Whenever, any bank assures the customers to pay in different types of money and when the customer can sell the promise or transfer it to somebody else, it is called the fiduciary money. Fiduciary money is generally paid in gold, silver or paper money. There are cheques and bank notes, which are the examples of fiduciary money because both are some kind of token which are used as money and carry the same value.

Commercial Bank Money:

Commercial Bank money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by cheque or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in person, via cheques or bank drafts, using automatic teller machines (ATMs), or through online banking.

 

1.3The quantity theory of money

 

In carrying out its functions and money to maintain price stability, it is important to match the volume of effective demand supply of goods. Compliance with this rule is motivated by the desire to prevent the delay in the sale of goods and services due to lack of circulation. Therefore, an important task - to provide the necessary economy of money and determine how much money should be in circulation.

The modern theory of demand for money is represented by different concepts. Consider the quantity theory of money. This theory first appeared in the XVI century., When the influx of gold from America to Europe increased by more than 2 times, silver - more than tripled. As a result, prices in Spain increased by 4.5 times, in England - 4 times in France - by 2.5 times, in Italy and Germany - in 2 times. Since that time, the dependence of prices on the amount of money in circulation was the subject of attention economics. Widespread quantitative theory was in the early XX century, when aggravated the problem of handling and purchasing power of paper money.

 

The quantity theory of money relates the money and commodity markets, establishing a direct link between the growth of money supply and rising commodity prices. All the fluctuations in economic activity are accompanied by changes in the money supply. The best known are two versions of the quantity theory of money: transactional approach, or theory I. Fischer, and the Cambridge version, or theory of cash balances.

Theory of Money of the American economist Irving Fisher (1867-1947) comes from the fact that since the money function as a medium of exchange, then the number needed for treatment in the economy, determined by weight and the price of goods sold. The theory is based on macro-economic equation of exchange:

MV=PQ

where M - quantity of money in circulation; V - velocity of circulation of currency, and P - the average level of prices; Q - quantity of all goods and services.

 

   The right-hand side of equation (heading) shows the volume of goods sold in the market. The left-hand side of (monetary) shows the amount of money paid when purchasing goods.

 

Cambridge version of the quantity theory of money developed a number of economists. For example, the equation of AC Pigou (1877-1959) as follows:

 

M=KPT

 

where M - quantity of money, and K - the proportion of annual income, which entities are willing to bear in the form of money (cash balances), P - the price level and T-physical volume of production.

II. Inflation: the essence, reasons and methods of anti-inflationary regulations

    2.1 Essence and causes of inflation

What is inflation? As an economic phenomenon inflation has been around for a long time. Considered that it came almost with the appearance of money to the operation of which is inextricably linked.

The term inflation (from the Latin inflatio - bloating) first began to be used in North America during the Civil War, 1861-1865. and refers to the process of swelling of paper money in circulation. In the nineteenth century this term was used in England and France. Widespread in the economic literature, the concept of inflation was in the twentieth century. after the First World War and the Soviet economic literature - from the mid 20's.

The most common, the traditional definition of inflation - the overflow channels of circulation money supply in excess of the needs of trade, which causes impairment of the monetary unit and thus increase in commodity prices.

However, the definition of inflation as an overflow channel of currency depreciating paper money should not be considered complete. Inflation, although it is manifested in the growth of commodity prices, can not be reduced to a purely monetary phenomenon. This is a complex socio-economic phenomenon, generated by the distortions of reproduction in different areas of the market economy. Inflation is one of the most acute problems of modern economic development in many countries around the world.

Inflation - this increase in the general level of prices for goods and factors of production. Of course this does not mean that necessarily all prices are rising. Even in periods of very rapid inflation, some prices may remain relatively stable, while others fall. One of the major sore points of inflation - is that prices tend to rise very uneven. Some jump, some rising more than a moderate pace while others did not rise.

Necessary to distinguish between internal and external factors (causes) of inflation. Among the internal factors can be identified non-monetary and monetary (monetary).

Non-monetary factors of inflation:

• violation of the imbalances the economy;
• cyclical development of the economy;
• monopolization of production;
• imbalance of investment;
• state-monopoly pricing

Monetary Inflation - a crisis of state finances, which is manifested in the following:

• the budget deficit;
• growth of public debt;
• issuance of money, etc

 

External factors of inflation are:

• global structural crisis (raw materials, energy, foreign exchange)
• monetary policy of the state aimed at illegal exports of gold and currency.

 

So inflation is a multifactorial process - is a manifestation of disproportion in the development of social reproduction, which is due to violation of the law of money circulation.

 

2.2 Money credit politics of  National Bank as a basic instrument of anti-inflationary processes

Monetary Policy of the Republic of Kazakhstan for 2012

   Due to unstable developments in foreign markets as well as given a short-term nature of the monetary policy implemented by the National Bank of the Republic of Kazakhstan, the decision was made to formulate the monetary policy of the Republic of Kazakhstan for 2012 only. Key monetary policy and balance of payments indicators including monetary policy measures for the subsequent years will be specified based on the performance in 2012.

   Ensuring the price stability i.e. maintaining a low rate of annual inflation adequate to the macroeconomic assumptions will remain as a top-priority area in the activity of the National Bank of the Republic of Kazakhstan in its monetary policy implementation in 2012.

      The National Bank of the Republic of Kazakhstan while implementing the monetary policy of the Republic of Kazakhstan will take measures for flexible regulation of money supply in the economy. In the event of short-term liquidity squeeze in the money market, the National Bank of the Republic of Kazakhstan will increase the volume of liquidity operations.

   At the same time, the National Bank of the Republic of Kazakhstan will be striving to maintain the monetary component at the optimal level and ensure that it doesn’t put additional inflationary pressure.

   Short-term notes and deposits of banks with the National Bank of the Republic of Kazakhstan will remain as the main instruments for sterilization of excessive bank liquidity as well as for interest rate regulation in the financial market.

Measures taken by the National Bank of the Republic of Kazakhstan will be aimed at enhancing the regulatory role of the interest rate policy and maintaining market rates in the market of short-term instruments within the interest rate band of the National Bank of the Republic of Kazakhstan.

    Also, the possibility of a more efficient use of open market operations is considered, and optimal parameters (volumes, maturities, types of collateral) of liquidity provided to banks are analyzed. To this end, the National Bank of the Republic of Kazakhstan studies the experience of developed countries to consider using the best foreign practice in future In general, this will allow increasing the efficiency of liquidity management and regulation as well as building the yield curve of financial instruments in the money market.

   In 2012 the National Bank of the Republic of Kazakhstan will continue to improve the mechanism of minimum reserve requirements in terms of increasing the efficiency of its application.

   Irrespective of the economic development scenario monetary policy measures will be aimed at keeping the annual inflation rate within 6-8%. The increase in excessive money supply that boosts the inflationary pressure will be adequately offset by the growth in sterilization operations of the National Bank of the Republic of Kazakhstan.

    The National Bank of the Republic of Kazakhstan will be applying any given monetary policy measures and foreign exchange policy measures taking account of integration processes occurring as part of the Common Economic Space.

FORECAST OF KEY MONETARY POLICY INDICATORS

FOR 2012 - 2014 

 

SCENARIO ONE                                      

 

	2011	2012	2013	2014
	actual	forecast
Inflation, %	7.4	6-8	6-8	6-8
Official Refinancing Rate,%	7.5	6-8	6-8	6-8
Reserve Money, KZT bln.	2 836	2 970	3 143	3 362
Money Supply, KZT bln.	9 751	9 821	10 356	11 049
Deposits of Residents, KZT bln.	8 385	8502	8 964	9 561
Credits to the Economy, KZT bln.	8 781	7 873	8 283	8 731
Monetization of the Economy, %	35.7	36.4	39.4	39.3