The use of statutory reserve requirement as a monetary policy tool has arguably diminished in recent years. Moreover, the money multiplier, a fundamental macroeconomic theory, which deals with the relationship between the monetary base, required reserves and the money supply, has been a target for some heavy critique. The money multiplier theory encompasses a required reserve ratio, excess reserve ratio and currency ratio to explain the changes in the money multiplier. The multiplier, which in itself is the ratio of the broad money and the monetary base, is described as a decreasing function of the ratios. In this paper, we calculate the respective ratios and employ a linear regression model based on the multiplier theory to examine the relationships between the ratios. The effects are estimated individually in USA, Eurozone, Japan and in a panel data analysis combining all three currency areas. We find that the reserve requirement ratios do not significantly explain the changes in the money multiplier in the USA or in the Eurozone. However, the reserve requirement ratios are found to have a significant effect in Japan and in the pooled data analysis. Further, in all of the cases, except in the Eurozone, the empirical model of the multiplier is found to explain significantly the variation in the multiplier, albeit with poor explanatory power in the pooled model. The varying explanatory power of the model and the altering significance of the reserve requirements suggests that the multiplier theory does not hold exactly. This implies that the effectiveness of the reserve requirements as a tool of monetary policy should not be taken as granted in contemporary economies.
| Identifer | oai:union.ndltd.org:UPSALLA1/oai:DiVA.org:hj-44113 |
| Date | January 2019 |
| Creators | Kangasniemi, Sakari, Iqbal, Ramil |
| Publisher | Internationella Handelshögskolan, Högskolan i Jönköping, IHH, Nationalekonomi |
| Source Sets | DiVA Archive at Upsalla University |
| Language | English |
| Detected Language | English |
| Type | Student thesis, info:eu-repo/semantics/bachelorThesis, text |
| Format | application/pdf |
| Rights | info:eu-repo/semantics/openAccess |
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