The central bank said money supply M2 reached AZN 6.081 billion and GDP stood at AZN 33.006 billion as of January 1.
This ratio is a bit below that of 2007.
The M2/GDP ratio measures the extent of monetization of the economy, and is the first symptom of liberalization, and inflation measures price instability in the economy.
This ratio makes 90-120% in the developed countries. By international practice, this ratio should be as high as 70% in developing markets, but most countries can’t achieve this.
In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time.
M2 is M1 + time deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists also use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 contains cash and assets that can quickly be converted to currency.
By classic macroeconomic theory, M2/GDP ratio measures the extent of money in the economy whereas this axiom is questioned because it doesn’t answer what causes the difference between GDP and money supply.
So, this ratio gauges whether money supply is too low or much in the economy and necessitates an increase or decrease respectively to reach the normal level.
It is generally accepted that an increase in money supply stimulates inflation. But this is the case in unhealthy economy and financial system.
However, injecting money into the financial sector, including the real economy by loans to increase the efficiency could boost production, reduce cost price and, ultimately bring down production costs.
As a rule, high monetization level is the indicator of predominance of long-term financial means in the economy while low monetization level is the sign of prevailing short-term investments.
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