Revisiting the Stability of Money Multiplier on Determination of Money Supply: Evidence from Canada

Serdar Ongan () and Ismet Gocer
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Serdar Ongan: St. Mary's College of Maryland

Economics Bulletin, 2019, vol. 39, issue 2, 1621-1628

Abstract: This study revisits the stability of the money multiplier on the determination of the money supply process for Canada under the assumption of potential nonlinear relation between the money supply (M1 and M2) and monetary base. To this aim, we apply the recently developed nonlinear autoregressive distributed lag (ARDL) model by Shin et al. (2014) between 2000M1-2018M09. This model decomposes the monetary base series into increases and decreases separately. The main empirical findings of this study indicate that the nonlinear model successfully detects potentially concealed proportional nonlinear (asymmetric) relations between monetary base and money supply (M1). Additionally, increases in monetary base have strong proportional relation with M1. This implies an almost stable money multiplier and exogenous money supply determination process for the Bank of Canada (BoC). This can be interpreted that the BoC determines money supply exogenously only its expansionary monetary policy in the long-run. This finding may allow the BoC to apply more proactive and manageable monetary policy.

Keywords: Stability of Money Multiplier; Nonlinear ARDL; Canada. (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2019-06-23
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