Tashkent, Uzbekistan (UzDaily.com) – Experts of the Institute for Macroeconomic and Regional Studies (IMRI) analyzed the issue of the optimal level of monetization of the economy of Uzbekistan.

To achieve economic stability, stimulate economic growth and reduce inflation, modern monetary policy requires governments and central banks to carefully manage the money supply, credit conditions and fiscal policy.

However, the propensity to tighten monetary policy in the countries of Central Asia in some cases may adversely affect investment activity and economic growth rates, through the risk of a liquidity crisis in business, especially in the small private business sector.

The quantity theory of money is the relationship between money, circulation velocity, price and output (MV=PY). The classical school argues that any increase in the money supply (M) leads to an increase in inflation (P). The Keynesian school, in turn, argues that price changes are determined primarily by the ability of the economy to absorb the amount of money in circulation (V) and the growth of the money supply (M) does not necessarily affect prices (P). For monetarists, inflation is always and everywhere a monetary phenomenon (M). The banking school says that the surplus money (M) the public will not want to keep in the form of banknotes and will deposit it and this will not necessarily affect prices (P).

In the last 10 years, the level of monetization of the economy of Uzbekistan was 25-28% of GDP, while the average estimates for most developing countries comparable to Uzbekistan in terms of economic scale and population reached 75-100% in this period. If we take large and medium-sized developing countries that achieved the highest and most stable GDP growth rates in this period (over 4-5% on an average annual basis - India, China, Vietnam, Indonesia and a number of others), then the level of monetization of their economies reached 150-180 %. This may indicate that the real sector of Uzbekistan is underfunded.

The results of an econometric analysis of indicators of the level of monetization, inflation, and investment dynamics made it possible to determine the acceptable limits in terms of inflationary risks for increasing the level of monetization of the national economy and how it will affect investment activity with a subsequent effect on economic growth:

- an increase in the level of monetization by 1 percentage point (p.p.), ceteris paribus, has led in recent years to an increase in investment in fixed assets by 0.2 p.p. (all as a percentage of GDP);

- inflation is not significant before crossing the threshold of the money supply in relation to GDP of 43%, after which it will increase by 0.3 percentage points;

- if Vietnam and Indonesia reach the level of economic management efficiency, the contribution of monetization to investment growth would increase from 0.2 p.p. to 7.3 p.p., and inflation will decrease by 0.5 p.p.

Main conclusion: in conditions of a moderate level of management efficiency, growth of monetization of the economy by expanding investment lending to businesses does not lead to acceleration of inflationary processes, as this creates additional opportunities for expanding existing and creating new production capacities, diversifying the economy, which increases the total supply of goods and services, increases competition between producers, and therefore limits price growth.