Components of Money Multiplier and their Relative Contributions

Abstract

The Money stock is the product of High Powered Money and Money Multiplier. However, money multiplier should not be regarded as a purely mechanical apparatus as is evident by the identity M = mH and argued by Majumdar (1976), Shetty et al (1976) and by the Second Working Group of the RBI (RBI Bulletin, 1977). Instead, it grows out of the interactions of banks, non-bank-public and decisions of monetary authorities. Essentially, it summarises the influences of all those factors other than changes in the high-powered money on the money stock process. Specifically, it reflects portfolio decisions of the non-bank-public when it decides on its currency and time deposit ratios; the behaviour of banks regarding the distribution of assets between excess reserves and earning assets and the behaviour of central bank when it sets reserve requirements on time and demand deposits and imposes additional reserves under the statutory provisions.

Keywords : Money Multiplier, High Powered Money, Required Reserves, Excess Reserves, M₂ Definition of Money and Liabilities