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Testing of money multiplier model for Pakistan: does monetary base carry any information?

Listed author(s):
  • Muhammad Arshad Khan

    (Pakistan Institude of Development Economist. Islamabad.)

This paper tests the constancy and stationarity of mechanic version of the money multiplier model for Pakistan using monthly data over the period 1972M1-2009M2. We split the data into pre-liberalization (1972M1-1990M12) and post-liberalization (1991M1-2009M2) periods to examine the impact of financial sector reforms. We first examine the constancy and stationarity of the money multiplier and the results suggest the money multiplier remains non-stationary for the entire sample period and sub-periods. We then tested cointegration between money supply and monetary base and find the evidence of cointegration between two variables for the entire period and two sub-periods. The coefficient restrictions are satisfied only for the post-liberalization period. Two-way long-run causality between money supply and monetary base is found for the entire period and post-liberalization. For the post-liberalization period the evidence of short-run causality running from monetary base to money supply is also identified. On the whole, the results suggest that money multiplier model can serve as framework for conducting short-run monetary policy in Pakistan. However, the monetary authority may consider the co-movements between money supply and reserve money at the time of conducting monetary policy.

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Article provided by Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna in its journal Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016).

Volume (Year): 9 (2010)
Issue (Month): (February)
Pages: 1-20

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Handle: RePEc:eac:articl:02/09
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  1. András Komáromi, 2007. "The effect of the monetary base on money supply – Does the quantity of central bank money carry any information?," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 2(1), pages 31-37, June.
  2. Johannes, James M & Rasche, Robert H, 1981. "Can the Reserves Approach to Monetary Control Really Work?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(3), pages 298-313, August.
  3. Buttler, H. -J. & Gorgerat, J. -F. & Schiltknecht, H. & Schiltknecht, K., 1979. "A multiplier model for controlling the money stock," Journal of Monetary Economics, Elsevier, vol. 5(3), pages 327-341, July.
  4. Darrin Downes & Winston Moore & Dwayne Jackson, 2006. "Financial liberalization and the stationarity of money multiplier," International Economic Journal, Taylor & Francis Journals, vol. 20(2), pages 227-240.
  5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  6. Muhammad Arshad Khan & Sajawal Khan, 2007. "Financial Sector Restructuring in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(Special E), pages 98-125, September.
  7. Karl Brunner & Allan H. Meltzer, 1964. "Some Further Investigations Of Demand And Supply Functions For Money," Journal of Finance, American Finance Association, vol. 19(2), pages 240-283, 05.
  8. Johannes, James M. & Rasche, Robert H., 1979. "Predicting the money multiplier," Journal of Monetary Economics, Elsevier, vol. 5(3), pages 301-325, July.
  9. Gangadhar Darbha, 2002. "Testing for long-run stability - an application to money multiplier in India," Applied Economics Letters, Taylor & Francis Journals, vol. 9(1), pages 33-37.
  10. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
  11. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
  12. Faiz Bilquees, 1993. "Determinants of Money Multipliers," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 32(4), pages 1055-1065.
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