Economy monetization

The monetization coefficient (or ratio) of the economy is an indicator that is equal to the ratio of the money supply aggregate M2 to the gross domestic product (GDP)—both nominated in current prices.{{cite web |last1=Khmurych |first1=Volodymyr |title=Explaining Monetization with Reference to Transitional Economies |url=https://kse.ua/wp-content/uploads/2019/02/khmurrych.pdf |publisher=Kyiv School of Economics |access-date=24 May 2021 |page=3 |date=May 1998}} The coefficient reflects the proportion of the total of goods and services of an economy that is monetized—being actually paid for in money by the purchaser—to substitute bartering.{{cite journal|last1=Wang |first1=Lei |title=A Farewell to Monetization |url=https://www.degruyter.com/document/doi/10.1515/me-2019-0007/html |journal=Man and the Economy |publisher=De Gruyter|access-date=24 May 2021 |language=en |doi=10.1515/me-2019-0007 |date=2019-12-01|volume=6 |issue=2 |s2cid=208868678 |url-access=subscription }} This is one of the most important characteristics of the level and course of economic development.{{cite web |last1=Chandavarkar |first1=Anand G. |title=Monetization of Developing Economies |url=https://www.elibrary.imf.org/view/journals/024/1977/003/article-A005-en.xml |website=IMF Staff Papers |access-date=24 May 2021 |language=en |doi=10.5089/9781451969450.024 |date=1977-01-01|doi-broken-date=1 November 2024 }} The ratio can be as low as 10–20% for the emerging economies and as high as 100%+ for the developed countries.

\mbox{Monetization coefficient} = \frac{\mbox{M2}}{\mbox{GDP}}

{{cite book |last1=Ramady |first1=Mohamed A. |title=The Saudi Arabian Economy: Policies, Achievements, and Challenges |date=5 December 2005 |publisher=Springer Science & Business Media |isbn=978-0-387-24935-3 |page=98 |url=https://books.google.com/books?id=gNE0sFFsNRoC&dq=Economy+Monetisation+M2/GDP&pg=PA98 |access-date=16 May 2022 |language=en}}{{cite book |last1=Myant |first1=Martin |last2=Cox |first2=Terry |title=Reinventing Poland: Economic and Political Transformation and Evolving National Identity |date=3 March 2008 |publisher=Routledge |isbn=978-1-134-05695-8 |page=50 |url=https://books.google.com/books?id=5AF9AgAAQBAJ&dq=Economy+Monetisation&pg=PA50 |access-date=16 May 2022 |language=en}}{{cite book |last1=Seck |first1=Diery |title=Regional Economic Integration in West Africa |date=18 November 2013 |publisher=Springer Science & Business Media |isbn=978-3-319-01282-7 |page=156 |url=https://books.google.com/books?id=sO8VAgAAQBAJ&dq=Economy+Monetisation+M2/GDP&pg=PA156 |access-date=16 May 2022 |language=en}}

The ratio is, in fact, based on the money demand function of Milton Friedman.{{cite journal |last1=Wang |first1=Lei |last2=Zhu |first2=Taihui |title=The myth of China's monetization |url=https://www.tandfonline.com/doi/abs/10.1080/13504851.2017.1366633 |journal=Applied Economics Letters |access-date=24 May 2021 |pages=772–775 |doi=10.1080/13504851.2017.1366633 |date=2018-06-25|volume=25 |issue=11 |s2cid=158867722 |url-access=subscription }}

This coefficient gives an idea of the degree of financial security of the economy. Many scientific publications calculate not only the indicator of M2/GDP but also M3/GDP and M1/GDP.{{cite book |last1=Chen |first1=Baizhu |title=Financial Market Reform In China: Progress, Problems, And Prospects |date=17 September 2019 |publisher=Routledge |isbn=978-0-429-72143-4 |page=173 |url=https://books.google.com/books?id=7U2wDwAAQBAJ&dq=Economy+monetization&pg=PA173 |access-date=4 May 2022 |language=en}} The higher the M3/GDP compared to M1/GDP, the more developed and elaborated the system of non-cash payments and the financial potential of the economy.{{cite journal |last1=Kanglin |first1=Zeng |last2=Peiwen |first2=Xu |last3=Jing |first3=Luo |title=Innovative thinking on the excess growth of money supply in China |journal=China Finance and Economic Review |publisher=De Gruyter |url=https://www.degruyter.com/document/doi/10.1515/cfer-2015-040208/html|access-date=24 May 2021|date=April 23, 2021|volume=4 |issue=2 |pages=115–128 |doi=10.1515/cfer-2015-040208 |doi-broken-date=1 November 2024 }} A small difference indicates that in this country a significant proportion of monetary transactions are carried out in cash, and the banking system is poorly developed. It is impossible to artificially increase the monetization coefficient; its growth is based on the high level of savings within the national financial system and on the strengthened confidence in the national economic policy and economic growth. The ability of the state to borrow money in the domestic market and implement social programs depends on the value of the coefficient.

The monetization ratio is positively related to the expected wealth and negatively related to the opportunity costs of holding money. A high level of economy monetization is typical for developed countries with a well-functioning financial sector. A low level of monetization creates an artificial shortage of capital and, consequently, investments. This fact limits any economic growth. At the same time, the saturation of the economy with money in an undeveloped financial system will only lead to an increase in inflation and, accordingly, an even greater decrease in the economy monetization. This is so due to the fact that the additional money supply enters the consumer market, increasing the aggregate demand, but does not proportionally affect the level of supply.

• There is a certain paradox associated with the difference between the nominal and real money supply. The uncontrolled monetary emission does not lead to an increase in the economy monetization—but to its decrease. The rapid increase of the nominal money supply during the period of high inflation leads to an increase in prices and, accordingly, in the nominal GDP, which outstrips the increase in the amount of money, which accordingly leads to a decrease in the monetization coefficient. In contrast, a decrease in the growth rate of the nominal money supply coupled with a growing GDP increases confidence in the national currency, leading to an increase in the economy monetization.{{cite web |title=МОНЕТИЗАЦИЯ ЭКОНОМИКИ |url=http://abc.informbureau.com/html/iiiaoecaoess_yeiiiieee.html |publisher=abc.informbureau.com |language=ru}}
• The GDP tends to change in a linear manner whereas the money supply may change exponentially. This fact may distort the real situation.
• For developed countries the relationship between growth in the money supply and the economic performance may become weak.{{cite web |last1=Ross |first1=Sean |title=What Is the Relationship Between Money Supply and GDP? |url=https://www.investopedia.com/ask/answers/070615/what-correlation-between-money-supply-and-gdp.asp |website=Investopedia |access-date=24 May 2021 |language=en |date=May 3, 2020}}
• Methods to calculate both GDP and M2 may vary from country to country, sometimes making a direct comparison between ratios troublesome.
• The money supply is measured on a specific date whereas the GDP is calculated for a specific period of time (year).

There are two primary nonmonetized sectors in the economy: subsistence and barter.{{cite book |last1=Gaĭdar |first1=Egor Timurovich |last2=Gaidar |first2=Yegor |last3=Gaidar |first3=Yegor Timurovich |title=The Economics of Transition |date=2003 |publisher=MIT Press |isbn=978-0-262-07219-9 |page=364 |url=https://books.google.com/books?id=4a_5zvTi8NgC&dq=Economy+monetization&pg=PA364 |access-date=4 May 2022 |language=en}} Modern economic publications define the economy demonetization as an increase in the share of barter in the economic life and its displacement of money as a medium of exchange. Demonetization, as a transition from monetary to barter exchange, oftentimes occurs during the periods of military operations and hyperinflation, that is, when money loses its natural role in the economy as a measure of value, means of circulation, accumulation, payment. Counterintuitively, the demonetization can also be observed in the peacetime, in the absence of the hyperinflation.{{cite journal|last1=Гуриев |first1=Сергей |last2=Попов |first2=Владимир |title=Трехглавая гидра безденежья |url=https://www.nes.ru/dataupload/files/media/publications/2001/Gidra.pdf |publisher=Эксперт |issue=9|access-date=25 May 2021 |date=2001}}

The microeconomic explanation of demonetization is the hypothesis of so-called "liquidity constraints". When entrepreneurs simply do not have enough money to carry out the necessary transactions, they have to resort to the commodity-for-commodity form of exchange. It is noted that in the context of financial crises the demonetization is associated with a strict state monetary policy. The monetary tightening (higher taxes, lower government spending, a reduction in the money supply to prevent inflation, etc.) leads to a relative stabilization of the financial sector, which, due to a decrease in liquidity, leads to the demonetization of the economy and exacerbates the production crisis. The monetary easing, in turn, exacerbates the financial crisis. Alternative explanations suggest that the demonetization can be a form of tax evasion.{{cite web |last1=Зоидов |first1=К. Х. |title=Кризисная цикличность и методология антикризисного регулирования переходной экономики России |url=http://ecsocman.hse.ru/data/218/427/1216/09-Zoidov.pdf |publisher=Higher School of Economics |access-date=25 May 2021 |language=ru}}

The table includes data for both developed and emerging economies.{{cite web |title=Коэффициент монетизации экономики в России и разных странах |url=https://prognostica.info/news/koefficzient-monetizaczii-ekonomiki-dinamika-v-rossii-i-stranah/ |publisher=prognostica.info |access-date=26 May 2021 |language=ru-RU |date=2019-06-05}}

• The Buffett indicator, a valuation multiple used to assess how expensive or cheap the aggregate stock market is at a given point in time by compares the capitalization of the US Wilshire 5000 index to the US GDP.{{cite web |last1=Ponciano |first1=Jonathan |title=Is The Stock Market About To Crash? |url=https://www.forbes.com/sites/jonathanponciano/2021/02/12/is-the-stock-market-about-to-crash/?sh=1d15c94b71de |website=Forbes |access-date=24 May 2021 |language=en}}
• Complementary currency
• Debt monetization
• Money multiplier
• Non-monetary economy

{{Reflist}}

• [https://www.investopedia.com/ask/answers/070615/what-correlation-between-money-supply-and-gdp.asp What Is the Relationship Between Money Supply and GDP?]
• [https://fred.stlouisfed.org/graph/?g=dZn M2 Money Stock (DISCONTINUED)/Gross Domestic Product]

{{Financial ratios}}

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