In a previous article, "A three-piece set for understanding the money circulation", we introduced two formulations of money circulation, M=G+I and V=1/(1-β). In another previous article, "A relationship between nominal GDP growth rate and government spending growth rate", we introduced a relationship between the above two growth rates. In this article, we show temporal evolutions of three growth rates on M, V, and nominal GDP (Y).
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| Growth rate of nominal GDP (y-axis) and growth rate of M=G+I (x-axis). |
This plot shows growth rates of M=G+I and nominal GDP. These growth rates are directly proportional with some variance. Under the flow of money circulation, magnitude of M=G+I determines magnitude of nominal GDP. This is a causal relationship.
From this result, we can conclude that the low growth rate of Japanese GDP in recent years comes from the low growth rate of M=G+I.
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