Money Creation in Russia: Does the Money Multiplier Exist?

For decades, the monetary economics literature has considered multiple deposit expansion via the money multiplier logic as empirically corroborated. However, the developments witnessed in advanced economies since the Global Financial Crisis challenged this settled view, and central banks as well as the Bank for International Settlements were among the first to openly reconsider it. In this paper, we revisit the issue empirically, but in a way aligned with a 'narrative' context of the evolving institutional frameworks for banking activities and monetary policy that profoundly and ultimately shape it out. Using a vector autoregression model estimated on Russian monthly data over two subsamples, 2005-2012 and 2012-2019, we find robust evidence that, while multiple deposit expansion may have existed in underdeveloped financial systems in the past, where the volume of lending was limited by the supply of bank reserves, nowadays lending is constrained mainly by the demand for credit. The key explanations we propose are: the rapid rise of money markets in the 20th- 21st centuries, the unlimited access to central bank liquidity provision facilities, and the evolution of bank management from the 'golden rule' of banking, where liquidity gaps aim at zero, to Asset and Liability Management, where banks flexibly manage liquidity gaps. Our results robustly show that the influence on real money balances of money supply factors, such as bank reserve requirements and the real monetary base, has become statistically insignificant over the recent decade in Russia, while that of money demand factors, such as the nominal interest rate, has remained significant and negative, which is consistent with the economic intuition we have suggested.