Analysis Of The Determinants Of The Money Multiplier

One country's monetary policy effect is explicitly represented by the money expansion extent while money multiplier is the right measurement tool which is defined by the ratio of broad money to currency base.The variables showed in traditional money multiplier equation,such as the ratio of currency to deposit, leakage,etc are indirect ones determined by other variables having mutually acted.In the past,some scholars tried to use mathematical approach to analyze the relationship between one single or few variables,such as GDP,Export/Import,etc with currency base.But the money expansion happens throughout the whole economy, relating to all financial and real economy entities,government,the gerneral public,and all of their acts,including borrowing and lending,buy and sale.Furthermore,the precedent always have cumulative impacts upon the current and the future. Therefore we can not cover the overall process of money expansion effectively in this way and from the mathematical perspective, variables shortage makes the consequent equation inaccurate thus it's not very meaningful by doing so.This thesis choose money multiplier as anlysis object,for trying to include as more variables as possible,GDP,fiscal expenditure,export/ import,imcome,rate, foreign exchange reserve,exchange rate,foreign capital,price index,currency base, etc,and by ADF testing,cointegration analysis,Granger Caualty Test,pulse response test and covariance decomposition,to discover how they behave in monetary expansion process and what is the relationship between M2's multiplier and them.This thesis's empirical study revealed that with government control of rate and exchange rate,the causality between money multiplier and some other variables inverted while some variables' change cause the money multiplier change in an unexpected direction,e.g.statutory reserve rate up during some period having led money multiplier up together.All these make Chinese monetary policy strength discounted greatly.