Zsolt Darvas was kind enough to compute (and make available) Divisia monetary aggregates for the Euro Zone.
Let´s use it compared to the US to see if we can make sense of the different economic behavior in the two “countries”.
First up a chart of the NGDP behavior relative to trend.
Note that in the US NGDP dropped proportionately more relative to trend than in the EZ.
How was money growth – Divisia M3 – behaving?
Money growth contraction was quite a bit stronger in the US
Ah! But note that money velocity dropped significantly more in the Euro zone.
So stronger monetary contraction in the US was partially offset by a weaker increase in money demand relative to what happened in the EZ, dampening the difference in NGDP behavior from what one would expect by looking only at money supply behavior.
Now, see that the tightening in April and July of 2011 by the ECB had a pretty depressing effect, pushing velocity down (money demand up). In the US, QE1 appears decisive to propel velocity up and a sucession of QEs helped keep velocity relatively stable. But with money growth similar in the two “countries”), it´s not surprising that the behavior of nominal GDP growth is so much weaker in the EZ.
PS Money is sufficient to tell the story, without any need to appeal to different degrees of “fiscal austerity” (which in any case have been more stringent in the US)
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