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The Determinants of the Money Multiplier in the United Kingdom

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  • Beenstock, Michael
  • Chan, Kam-Fai

Abstract

We use annual data drawn from 1950-85 to estimate an econometric model of the money multiplier for the United Kingdom. We define the money multiplier as ratio of the money stock broadly defined (M3) and the monetary base (M0), and then decompose the multiplier into the currency ratio, the time deposit ratio and the reserve ratio. We find that the multiplier has been increased by institutional changes. These have arisen as banks have been deregulated and as they have competed for sight deposits by offering interest-bearing accounts. We find that the multiplier increases as interest rates rise because the demand for cash and the demand for bank reserves fall. The money multiplier also varies directly with the level of economic activity. An increase in the demand for money would therefore lead to an increase in the money supply, assuming that the monetary base (M0) is unchanged.

Suggested Citation

  • Beenstock, Michael & Chan, Kam-Fai, 1986. "The Determinants of the Money Multiplier in the United Kingdom," CEPR Discussion Papers 106, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:106
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    Cited by:

    1. Mr. Robert Tchaidze & Mr. Salome Tvalodze, 2011. "Deposit Formation in Georgia," IMF Working Papers 2011/078, International Monetary Fund.
    2. Perry Warjiyo, 1990. "A Multiplier Model of Money Stock Control for Indonesia," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 38, pages 359-383, Desember.
    3. Damjanovic, Tatiana & Girdėnas, Šarūnas, 2014. "Quantitative easing and the loan to collateral value ratio," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 146-164.
    4. Gabriel Di Bella & Mr. David Hauner, 2005. "How Useful is Monetary Econometrics in Low-Income Countries? T+L3104he Case of Money Demand and the Multipliers in Rwanda," IMF Working Papers 2005/178, International Monetary Fund.
    5. George M. Georgiou & George Syrichas, 1994. "The Underground Economy: An Overview and Estimates for Cyprus," Working Papers 1994, Central Bank of Cyprus.
    6. Tatiana Damjanovic & Sarunas Girdenas, 2013. "Should Central Bank respond to the Changes in the Loan to Collateral Value Ratio and in the House Prices?," Discussion Papers 1303, University of Exeter, Department of Economics.

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