Mr. Khatkhate, Advisor in the Central Banking Service, is a graduate of the Universities of Bombay and Manchester. He was formerly Director of Research in the Reserve Bank of India. He has contributed numerous articles on planning, trade, and monetary policy to academic journals.
Mr. Villanueva, economist in the Central Banking Service, is a graduate of the University of the Philippines and of the University of Wisconsin. He is the author of several articles on mathematical growth models and quantitative monetary policy in academic journals.
Joachim Ahrensdorf and S. Kanesa-Thasan, “Variations in the Money Multiplier and Their Implications for Central Banking,” Staff Papers, Vol. VIII (1960), pp. 126–49; V. V. Bhatt, “The Creation of Bank Money: A Comparative Study,” The Bankers’ Magazine (London), November 1961, pp. 322–28; P. R. Narvekar, “The Creation of Bank Money: A Comment,” The Bankers’ Magazine (London), March 1963, pp. 201–205; S.L.N. Simha, V. V. Bhatt, A. G. Chandavarkar, and D. R. Khatkhate, “Analysis of Money Supply in India—II,” Reserve Bank of India Bulletin (Bombay), August 1961, pp. 1214–19; Richard Goode and Richard S. Thorn, “Variable Reserve Requirements Against Commercial Bank Deposits,” Staff Papers, Vol. VII (1959), pp. 9–45; Rattan J. Bhatia, “Factors Influencing Changes in Money Supply in BCEAO Countries,” Staff Papers, Vol. XVIII (1971), pp. 389–98.
Karl Brunner and Allan H. Meltzer, An Alternative Approach to the Monetary Mechanism, Committee on Banking and Currency, House of Representatives Subcommittee on Domestic Finance (88th Congress, 2nd Session, August 17, 1964); Karl Brunner and Allan H. Meltzer, “Some Further Investigations of Demand and Supply Functions for Money,” The Journal of Finance, Vol. XIX (1964), pp. 240–83; David I. Fand, “Some Implications of Money Supply Analysis,” American Economic Association, Papers and Proceedings of the Seventy-Ninth Annual Meeting (The American Economic Review, Vol. LVII, May 1967), pp. 380–400.
Phillip Cagan, The Demand for Currency Relative to Total Money Supply, Occasional Paper No. 62, National Bureau of Economic Research, Inc. (New York, 1958).
Ibid., p. 25.
George Macesich, “Demand for Currency and Taxation in Canada,” The Southern Economic Journal, Vol. XXIX (1962), pp. 33–38; see also Frank Brechling, “The Public’s Preference for Cash,” Banca Nazionale del Lavoro, Quarterly Review (September 1958), pp. 377–93.
J. Daniel Khazzoom, The Currency Ratio in Developing Countries (New York, 1966).
Peter A. Frost, “Banks’ Demand for Excess Reserves,” Journal of Political Economy, Vol. 79 (July/August 1971), p. 806.
This is the approach popularized by James Tobin, “Commercial Banks as Creators of ‘Money’,” in Banking and Monetary Studies, ed. by Deane Carson (Homewood, Illinois, 1963). See also, for excellent exposition of this and other views on the behavior of banks, Thomas Mayer, Monetary Policy in the United States (New York, 1968), pp. 80–82.
George Randolph Morrison, Liquidity Preferences of Commercial Banks (University of Chicago Press, 1966).
Frost, “Banks’ Demand for Excess Reserves” (cited in footnote 7), p. 819.
J. J. Polak and William H. White, “The Effect of Income Expansion on the Quantity of Money,” Staff Papers, Vol. IV (1955), pp. 398–433; Frost, “Banks’ Demand for Excess Reserves” (cited in footnote 7), p. 819. There has also been extensive discussion about the banks’ behavior as a whole, which comprehends not only their demand for excess reserves but also their borrowing and lending. The main issue investigated empirically is whether banks borrow for need or for profit, and a general conclusion is that they borrow for both. In this connection, see Stephen M. Goldfield, Commercial Bank Behavior and Economic Activity (Amsterdam, 1966), p. 151; Brunner and Meltzer, “Some Further Investigations of Demand and Supply Functions for Money” (cited in footnote 2); Stephen M. Goldfield and Edward J. Kane, “The Determinants of Member-Bank Borrowing: An Econometric Study,” The Journal of Finance, Vol. XXI (1966), pp. 499–514; and Alexander James Meigs, Free Reserves and the Money Supply (University of Chicago Press, 1962).
Frost, “Banks’ Demand for Excess Reserves” (cited in footnote 7), p. 821.
Ronald L. Teigen, “Demand and Supply Functions for Money in the United States: Some Structural Estimates,” Econometrica, Vol. 32 (1964), pp. 476–509.
Brunner and Meltzer, An Alternative Approach to the Monetary Mechanism (cited in footnote 2), pp. 1–77; Brunner and Meltzer, “Some Further Investigations of Demand and Supply Functions for Money” (cited in footnote 2), pp. 240–83; Frank de Leeuw, “A Model of Financial Behavior,” in The Brookings Quarterly Econometric Model of the United States, ed. by James S. Duesenberry, Gary Fromm, Lawrence R. Klein, and Edwin Kuh (Chicago, 1965), pp. 465–530; Fand, “Some Implications of Money Supply Analysis” (cited in footnote 2).
Philip Cagan, Determinants and Effects of Changes in the Stock of Money, 1875–1960 (Columbia University Press, 1965).
Brunner and Meltzer, An Alternative Approach to the Monetary Mechanism (cited in footnote 2), p. 32.
Brunner and Meltzer, “Some Further Investigations of Demand and Supply Functions for Money” (cited in footnote 2), p. 271.
Warren L. Smith, “Time Deposits, Free Reserves, and Monetary Policy,” in Issues in Banking and Monetary Analysis, ed. by Giulio Pontecorvo, Robert P. Shay, and Albert G. Hart (New York, 1967).
For a description of the Almon polynomial distributed lag, see Shirley Almon, “The Distributed Lag Between Capital Appropriations and Expenditures,” Econometrica, Vol. 33 (1965), pp. 178–96.
For an explanation of this relationship based on optimizing behavior of banks, see Franco Modigliani, Robert Rasche, and J. Philip Cooper, “Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest,” Journal of Money, Credit and Banking, Vol. II (1970), pp. 180–98.
Victor Argy, “The Determinants of the Money Supply” (unpublished, International Monetary Fund, September 4, 1970).
The complete set of data is available in typescript on application to the Central Banking Service, International Monetary Fund, 19th and H Streets, N. W., Washington, D. C. 20431 U. S. A.
The nonlinear program used was the LSAUTO of Data Resources, Inc. No attempt was made to reduce simultaneous equation bias.
Carl F. Christ, “Interest Rates and ‘Portfolio Selection’ among Liquid Assets in the U. S.,” Chapter 8 in Measurement in Economics: Studies in Mathematical Economics and Econometrics in Memory of Yehuda Grunfeld (Stanford University Press, 1963), pp. 201–18.
Edgar L. Feige, The Demand for Liquid Assets: A Temporal Cross-Section Analysis (Englewood Cliffs, New Jersey, 1964). Feige’s sample period was 1949–59, covering the then 48 United States (plus the District of Columbia). His interest rates were computed as actual, as opposed to the announced nominal, interest payments (derived from income and expense statements of the financial institutions) divided by the average balance of the asset during a period. According to him, the actual interest payment is used because it represents more clearly the real market opportunities facing the saver.
Almon, “The Distributed Lag Between Capital Appropriations and Expenditures” (cited in footnote 19).
The estimates of αi and βi are
α0 = 0.5468
α1 = 0.3563
α2 = 0.2006
α3 = 0.0799
α4 = −0.0058
α5 = −0.0567
α6 = −0.0727
α7 = −0.0538
β0 = 0.5894
β1 = 0.3718
β2 = 0.1953
β3 = 0.0599
β4 = −0.0342
β5 = −0.0873
β6 = −0.0993
β7 = −0.0702
This multiplier may be rewritten as
Rewritten in this way, it is analogous to the usual expression of the money multiplier in terms of the currency to money ratio, that is,
which measures the response of the supply of money to a change in the monetary base in a rather mechanistic manner. On the other hand, the money multiplier given by equation (13b) or (13) measures the response of the quantity of money to a change in the base, taking account of behavioral responses of both supply of and demand for money.
Jordan, for example, refers to factors influencing money supply as changes in components of the “money multiplier” and changes in the monetary base. By this he implies that these two factors are separate and not interdependent. Jerry L. Jordan, “Elements of Money Stock Determination,” Review, Federal Reserve Bank of St. Louis (October 1969), pp. 10–19.
Teigen has explained open market policy and discount rate policy in terms of several variables, such as the gap between actual and potential GNP, unemployment, rate of price change, growth rate of real output, and the balance of payments. See Ronald L. Teigen, “An Aggregated Quarterly Model of the U. S. Monetary Sector, 1953–1964,” in Targets and Indicators of Monetary Policy, ed. by Karl Brunner (San Francisco, 1969), pp. 175–218.