Money Stock Determinants : High Powered Money and Money Multiplier

Abstract

The idea that variations in money stock affect the economy's income, output, employment and price level has been around in one form or another for at least a couple of hundred years. However, there has been less universal agreement on precisely what in the economy money affects, how effects are transmitted and the stability of relationships. The broad objectives of monetary policy in India have been to regulate monetary expansion so as to maintain a reasonable degree of price stability and to ensure adequate economic growth. One proposal that has received consideration is that the rate of growth in the money supply should be the only guide to monetary policy. Granted the assumption of a direct link between changes in the money supply and the level of economic activity, the proper policy prescription would seem to be to control changes in money supply. A convenient and customary analytical device of creation of money stock is summarised in form of money multiplier, which shows the relationship between money stock and high powered money. The choice of money stock as a target of monetary policy is more reliable measure and an indicator is free from ambiguities and is simple to operate. This approach indicates the role of high powered money and money multiplier in determination of money supply. In this article an effort has been made to calculate the value of money multiplier and high powered money in affecting the money supply in India for the period 1980-81 to 2011-12.

Keywords : Money multiplier, High powered money, Broadly defined money stock, relative contributions.