Journal of Economic Studies

The Existence of a Stable Money Multiplier in the Small Open Economy of Kazakhstan
Razzaque Hamza Bhatti, Muhammad Junaid Khawaja,
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Razzaque Hamza Bhatti, Muhammad Junaid Khawaja, "The Existence of a Stable Money Multiplier in the Small Open
Economy of Kazakhstan", Journal of Economic Studies, https://doi.org/10.1108/JES-10-2017-0284
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 The Existence of a Stable Money Multiplier in the Small Open Economy of
Kazakhstan

Abstract
Purpose – This paper examines whether a long-run stable money multiplier exists in
Kazakhstan. It also investigates whether different episodes of currency shocks, including
the financial crisis and recession of 2008-2010, have affected the working of the money
multiplier in Kazakhstan.
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Design/methodology/approach – The long-run multiplier is tested employing three

cointegration tests: Engle-Granger (1987), Phillips-Ouliaris (1990) and Johansen and
Juselius (1990).
Findings – The results of cointegration and coefficient restrictions tests are consistent
with the money multiplier when broad money (M2 and M3) is used rather than when
narrow money (M1) is used. The relationship between broad money and monetary base is
structurally stable when examined on the basis of a dynamic (an error-correction) model.
However, the M2 multiplier performs better than the M3 multiplier.
Research limitations/implications – This paper is restricted to testing a mechanistic
version of the money multiplier and its stability using both narrow (M1) and broad
money (M2 and M3) supplies. Thus, the paper focuses on the money-view of the
multiplier rather than the credit- view of the multiplier.
Practical implications – One implication that emerges from the findings of this paper is
that the National Bank of Kazakhstan can control M2 by controlling the monetary base,
and hence the latter can serve as an indicator for monetary policy.
Social implications – The validity of the money multiplier implies that monetary policy
can be conducted to control the money supply and the provision of bank credit to private
sector to stabilize economic activity, thereby leading towards social stability in the
economy as well.
Originality/value – In addition to offering a coherent survey of the literature on the
standard money multiplier, this paper is a first attempt to find a stable money multiplier
for Kazakhstan.

1
 Keywords – Credit view model, monetary transmission mechanism, money multiplier,
lending channel
Paper type – Research paper

1. Introduction
This paper investigates for a small open economy of Kazakhstan the existence of a stable
long-run relationship between the money stock and monetary base, as embedded in a
“mechanistic” version of the money multiplier model. This model, which was put forth
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by Friedman and Schwartz (1963)1 and developed formally by Brunner and Meltzer
(1964), postulates that there is a stable relationship between the monetary base and
money stock, and that a central bank can control the monetary base rather closely,
thereby controlling the money stock as well as the provision of bank credit to private
sector to stabilize an economy. Since the 1980s, two broad transmission mechanisms
have been suggested regarding the money multiplier: the “money channel” and the
“credit channel”2. The standard “money view” suggests that the volume of deposits that
banks supply helps determine the overall interest rate, which clears the money market
thereby affecting the borrowing and lending behavior in the economy3. Bernanke and
Blinder (1988) proposed the “credit view”, in which the volume of bank loans helps
determine how close the interest rate on bank loans is to the interest rate on marketable
securities4. This view emphasizes that in the process of creating money, banks extend
credit (make loans) and their willingness to make loans has its own independent impact
on aggregate spending. One implication of the standard money multiplier is that if banks
found themselves with excess reserves they would try to lend the money out, thereby
increasing the availability of credit, driving down the borrowing rates for private-sector

1
This model provides the basic analytical framework around which Friedman and Schwartz (1963)
construct their greatest work on Monetary History of the United States (see Goodhart, 2010).
2
See Bernanke (1988; p.4-10) and Bernanke and Blinder (1988) for a detailed discussion.
3
The logic underling the money-view goes as follows: (i) central bank adds liquidity to the banking system
by buying bonds or foreign exchange via open market operations, (ii) other banks create money by selling
deposits via making loans and buying bonds, (iii) the added liquidity reduces market interest rates and (iv)
a lower level of market rates and greater liquidity stimulates aggregate spending (see Bernanke, 1988; p. 3-
5).
4
The credit-view adds to the traditional IS-LM model of the closed economy another financial asset: bank
loans. These loans are imperfect substitutes for bonds, unlike the Brunner-Meltzer multiplier model, and
carry an interest rate that is distinct from that for bonds.

2
 and hence stimulating economic activity in the economy. Yet this relationship between
the monetary base and money stock (and bank lending) collapsed in the major developed
countries, the U.S., U.K. and Euro area during the international crisis and recession of
2008-20105. Besides, the prior relationship between the underlying variables could not be
reinstated to stimulate the economy when the authorities undertook measures to use this
relationship to expand the money stock (and bank lending) by force-feeding the banks
with the monetary base6. Abrams (2011) demonstrates through a variant of the credit-
view money multiplier model that “holding constant the money supply following various
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financial-sector shocks, including an autonomous drop in the money multiplier, is

insufficient to prevent aggregate demand from decreasing”.
The monetary history of Kazakhstan provides abundant evidence on the role monetary
policy has played in stabilizing the economy. Since its independence in November 1993,
the National Bank of Kazakhstan (NBK) has utilized both interest-rate and credit
channels to manage aggregate spending to control inflation. The transition towards the
price mechanism, particularly in the absence of competitive economic environment,
resulted in hyperinflation and a decline in national output. By pursuing tight monetary
policy targeting monetary aggregates, the NBK had successfully reduced inflation
substantially from 3060% in 1992 to 2265% in 1993 to 1258% in 1994 to 60.30% in
1995 and to 1.9% in 19987. Since 1995, the NBK has practiced an eclectic mixture of
intermediate targets for monetary policy. The Kazakh monetary policy has seen several
shifts: (i) monetary targeting with flexible exchange rates (1993:11-1995:06), (ii)
monetary targeting with stable exchange rates (1995:06-1998:08), (iii) inflation targeting
with flexible exchange rates within currency corridors (1999:04-2014:02) and (iv)
inflation targeting with flexible exchange rates without currency corridors (2015:08-
todate)8.

5
See, for example, Hagen (2009), Goodhart (2010), Williams (2011) and Abrams (2011).
6
After September 2008, the monetary base almost doubled in the U.S., slightly declined, but then continued
to increase during the first half of 2009. In contrast, while M2 practically remained unaffected by the crisis,
M1 increased by about 20% in the late 2008 but it flattened soon afterwards. The M1 and M2 multipliers,
which remained almost stable until the late 2008, dropped sharply and could not pick up. See, for example,
Hagen (2009). Also see Goodhart (2010), Williams (2011) and Abrams (2011) for more discussion.
7
For a detailed analysis, see Monetary Policy of the Republic of Kazakhstan to 2020 (2015; p. 3-4).
8
In transition countries, monetary targeting has often been used to curb high inflation. Kazakhstan
abandoned this policy on the grounds that the growth rate of the monetary base does not correspond to the

3
 This paper contributes to the empirical literature on the standard money multiplier model.
To this end, cointegration analysis is employed to test whether a stable long-run money
multiplier exists in Kazakhstan. Testing the existence of a stable money multiplier is
important because an evidence supportive of the multiplier would provide the NBK a
reasonable theoretical basis and a sound empirical rationale for targeting a desirable
growth path in monetary aggregates consistent with growth rates in prices and output.
One reason motivating this work is to test if the monetary base can serve as an
intermediate target for monetary policy. Second reason is to examine if the international
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financial crisis of 2008-2009 had any implications for the validity of the multiplier. While
a massive amount of work has been conducted for advanced and developing countries,
only little work exists on the money multiplier for Kazakhstan to the best of our
knowledge. The rest of the paper is structured as follows. Section 2 provides a brief
description of the multiplier model, whereas Section 3 presents a review of some selected
studies in the underlying area. The data and empirical results are presented in Section 4,
while Section 5 provides some concluding remarks and implications.

2. The Multiplier Model

In a mechanistic form, the money multiplier may be represented as follows:
M = kB (1)
where M is the money stock (measured in a narrow sense or a broad sense), B is the
monetary base, and k is the money multiplier (i.e. the ratio of the money stock to the
monetary base, M/B). Equation (1) can be derived from the two identities9
M =C+D (2)
B=C+R (3)
where M comprises of currency holdings (C) and demand deposits (D) held by the non-
bank public sector and commercial banks respectively. On the other hand, B consists of C
and reserves (R) held by commercial banks. Suppose banks are required to keep a

dynamics of inflation, and as such the monetary base cannot serve as an intermediate target of monetary
policy for decreasing inflation (see Monetary Policy of the Republic of Kazakhstan to 2020; p.18-19).
9
Goodhart (2010) argues that while Equation (1) is frequently misinterpreted as behavioural equation, it is
in fact a definitional identity, derived from the two identities.

4
 fraction r of demand deposits as legally required reserves and the non-bank public a
fraction c of bank deposits as cash. Formally
R = rD, 1 > r > 0 (4)
C = cD, 1> c > 0 (5)
Dividing equation (2) by equation (3), and then substituting equations (4) and (5) into the
resulting expression , we derive equation (1)
c +1
M= B (6)
c+r
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where k = (c + 1) /(c + r ) 10. Equation (6) implies that the stability of money multiplier
may be attributed to the stability of the underlying components: the currency ratio and the
reserve ratio. Monetarists argue that the multiplier is stable and independent of monetary
policy actions, and, consequently, its impact can be predicated fairly accurately. In a
testable stochastic form, equation (6) can be written as
mt = h + β bt + u t (9)
where m, h and b are the natural logarithmic values of M, k and B respectively. For the
money multiplier to be valid in the long run, m and b must be cointegrated such that h>0
and β=1. For the stability of the multiplier, the underlying coefficients must be insensitive
to structural changes over the sample period. If m and b are cointegrated with a
cointegrating vector (h, β ) = (0,1) , then the money multiplier (M/B) equals the random
error term, that is ut = mt − bt . In cointegration context, testing a unit root in the error term
amounts to testing whether the money multiplier is stable (mean-reverting) over time.

3. Literature Review
Empirical work on the standard money multiplier has broadly followed three main
strands11. The first strand relates to work conducted, inter alia, by Burger et al. (1971),
Burger (1972), Bombholf (1977), DeRosa and Stern (1977), Johannes and Rasche (1979),

10
If banks hold excess reserves (e), then Equation (6) will be equal to M = [(c + 1) /(c + r + e)]B . In a special
case, where c=0 and e=0, equation (6) will reduce to M = (1 / r ) B , implying that an increase in B will
cause an increase in M by the magnitude of the multiplier.
11
A massive amount of work has been carried out on the credit-view of money multiplier (see, for example,
Bernanke and Blinder, 1992; Kashyap et al., 1993; de Mello and Pisu, 2011; Carpenter and Demiralp,
2012; and Motes and Machado, 2013).

5
 Buttler et al. (1979), Fratianni and Nabli (1979), Hafer et al. (1983) and Hafer and Hein
(1984). These studies develop alternative models for forecasting the multiplier. The
earliest work carried out by Burger et al. (1971) and Burger (1972) use the regression
method12 to predict the U.S. M1 multiplier. Burger et al. (1971) forecast each month’s
money multiplier on the basis of the three-month moving average of the past multiplier
values, the reserve adjustment magnitude to capture the effects of reserve requirement
changes, and the dummy variables to account for seasonality. Burger (1972) follows
similar approach extending the regression model to incorporate as input only those
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variables that he claims the Fed can be assumed to know without error. The multiplier
forecast model he tests incorporates the lagged percentage change in the Treasury bill
rate instead of the reserve adjustment magnitude. Subsequent studies carried out by
Bomhoff (1977), DeRosa and Stern (1977), Johannes and Rasche (1979), Buttler et al.
(1979) and Fratianni and Nabli (1979) apply aggregate time series and component models
to forecast the multiplier. Employing the Box-Jenkins (BJ) method, Bomhoff (1977)
finds that his forecasts of the U.S. M1 multiplier are approximately 30% more accurate
than those reported in the earliest studies. Using similar method to forecast different
multipliers for the Netherlands, he concludes that “if the Dutch Central Bank invested
more resources in the collection of data from the banks, then predictions could be made
sufficiently accurate for use in the control of the money stock”. Similar approach is used
by Buttler et al. (1979) and Frantianni and Nabli (1979) to forecast the money multiplier
for Switzerland and seven EEC countries, respectively. In contrast, Johannes and Rasche
(1979) employ a component approach and find results suggesting that their multiplier
forecasts generated based on the behavioural components are more accurate than those
reported by earlier studies. Hafer et al. (1983) compare the forecasting ability of the BJ
method with that based on the Kalman filter and produce an improvement in the
multiplier forecasts when the latter method is used. In contrast, Hafer and Hein (1984)
compare aggregate time series and component models in forecasting the U.S. M1
multiplier and show that “the components approach is more accurate in forecasting,

12
Burger et al. (1971) distinguish among three methods for predicting the money multiplier: (i) the
definitional method (whereby k is defined as M/B); (ii) the regression method (whereby k is predicted
using some explanatory variables); and (iii) the behavioural method (whereby k is defined in terms of
different ratios).

6
 because it accounts for certain ratio-specific changes that are masked in the aggregate
model”.
The second strand deals with work undertaken, among others, by Burger (1988),
Beenstock (1989) and Gauger (1998) who explore the money multiplier behaviour and
the factors determining that behaviour. Burger (1988) argues that prior to the early 1980s,
there was a fairly stable relationship on annual basis between the growth rates of the
monetary base and the growth rates of M1, M2 and M3 in the U.S. This relationship
changed quite dramatically during the 1980s, because of introduction of new financial
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assets and major changes in inflation, interest rates and the basic characteristics of the
most traditional monetary assets. Beenstock (1989) argues that until 1971 the money
multiplier had been relatively stable in the U.K. but it has more than doubled since then.
He demonstrates that over the period 1965-1984, the multiplier grew by 12.5%, of which
8.9% increase was due to a rise in the time deposit ratio and 5.8% due to a fall in the
reserve ratio, whereas the multiplier fell by 2.4% due to a rise in the currency ratio.
Beenstock (1989) examines the behaviour of the U.K. multiplier over the period 1950-
1984 by employing the 3SLS method and produces results suggesting that the money
multiplier is quite sensitive to interest rates and real income. Similar results are obtained
for the U.S. M1, M2 and M3 multipliers by Gauger (1998) who shows that there is
significant impact on the underlying multipliers of select opportunity costs, the yield
curve and real income. These results are interpreted as indicating a high degree of
endogeneity in the money supply process via the multiplier.
The final strand relates to work carried out by Ford and Morris (1996), Al-Lougani and
Moosa (1996), Baghestani and Mott (1997) and Darbha (2002) who test the long-run
money multiplier and its stability. Ford and Morris (1996) employ the maximum
likelihood method of cointegration of Johansen and Juselius (1990) to test the long-run
multiplier for the U.K. and document results showing that “the cointegrating relationships
are such that it is difficult to discern any difference between the five aggregates that we
have used in this study”. These results are interpreted as indicating that the monetary base
has strong predictive effect on inflation and output through interest rates with a
substantial lead time. However, results based on error-correction model and causality do
not confirm any causal relationship among monetary aggregates, output and prices.

7
 Baghestani and Mott (1997) argue that “In the United States there is some theory and
evidence that the differential between short-term interest rates and the Federal Reserve
discount rate may affect the amount of M1 created for a given amount of monetary base
by inducing a change in banks’ holdings of excess reserves”13. In an earlier study,
Baghestani and Mott (1988) find that the explanatory power of these variables itself
changes when the Fed attempts to operate by means of the federal funds rate or non-
borrowed reserves. Baghestani and Mott (1997) employ cointegration to test the long-run
multiplier and construct an error-correction model to test the short-run dynamics. Using
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monthly data for the U.S. over the period 1983:01-1990:06, they produce results
supportive of the long-run relationship between M1, the monetary base and the bank
deposit rate. They demonstrate that “deregulating bank deposit interest rates makes the
relation between the monetary base and M1 more predictable”. Al-Loughani and Moosa
(1996) test the long-run money multiplier for the small open economy of Kuwait. Using a
battery of econometric tests, they obtain results showing the absence of a long-run
relationship between M2 and the monetary base. The evidence is, however, supportive of
the long-run relationship between M1 and the monetary base, though it is not structurally
stable. Applying Gregory and Hansen’s (1996) cointegration and stability tests, Darbha
(2002) finds a stable but time-varying long-run relation between the money supply and
reserve money for India. Overall, there is mixed evidence on the standard money
multiplier in different countries.
4. Sample Data and Cointegration Results
The existence of a stable long-run multiplier is tested for Kazakhstan using monthly data
on the monetary base and M1, M2 and M3 measures of money covering the period
2000:01-2017:0614. One reason for choosing this period is that there had been several
shifts in monetary policy over this period from targeting monetary aggregates to targeting
inflation, thereby creating an environment unlikely to be conducive for a stable
multiplier. Second reason is that over this period the country had undergone several
episodes of currency crises, an environment quite unfavorable for the multiplier.
Notwithstanding such opposing economic situations, the casual observation (as shown in

13
See, for example, Teigen (1964), Gibson, 1972 and Baghestani and Mott (1988).
14
All data series were obtained from the NBK’s web site.

8
 Figure 1) supports the existence of the multiplier, since the underlying series appear to
move together over time. Moreover, as shown in Figure 2, although the M2 and M3
multipliers move upward together, they seem to fluctuate around their long-run (average)
values over time. This is also supported by unit root tests as shown in Table 1. Clearly,
although these multipliers fell sharply due to different currency events, including the
international financial crisis of 2008-2009, they did pick up their values after each event.
This evidence sharply contrasts with the multiplier behaviour in the U.S.15. Moreover,
there seems to be no big difference between the pre-crisis and post-crisis behaviour of the
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multipliers. The M1 multiplier tends, however, to move downwards over time, albeit it
fell below unity and failed to recover in 2014 when the country moved to floating
exchange rates.
A need, therefore, arises to test formally whether a stable long-run money multiplier
exists in Kazakhstan. Prior to testing the long-run relationship between the monetary base
and M1, M2 and M3 measures of money, tests are carried out to determine if the
underlying series contain the same order of integration. To this end, two tests of unit root
are applied: Dickey-Fuller (1979) and Phillips-Ouliaris (1990) tests. Results, as reported
in Table 1, show that all the variables are I(1) in level and I(0) in first difference at the
1% significance level, except for M1 and M3 when ADF is used. While the null of a unit
root in the level is rejected in the latter case, it is not in the former case. To resolve this
inconsistency in unit root results, we base our judgment on the PP test. Because the PP
test is more robust with respect to a wide variety of serial correlation and time-dependent
heteroscedasticity16, both M1 and M3 can be treated as I(1) in level and I(0) in first
difference.
Testing for cointegration is based on three tests: Engle-Granger (1987), Phillips-Ouliaris
(1990) and Johansen-Juselius (1990). Two test statistics are used in conjunction with
each test: while EGτ and EGµ and Zτ and Zµ test statistics are used in conjunction with
the first two residual-based cointegration tests respectively, Trace and Max tests are used
in conjunction with the maximum likelihood cointegration test of Johansen and Juselius
(1990). While the results of residual-based cointegration tests and coefficient restrictions,

15
See, for example, Hagen (2009).
16
Moosa and Bhatti (1997; p.149) argue that “If normality, serial correlation or heteroscedasticity statistics
are significant, the Phillips-Perron procedure should be adopted”.

9
 as reported in Table 2, are strongly supportive of the long-run existence of M2 and M3
money multipliers, they are not so for the M1 multiplier. In contrast, the results of the
Johansen-Juselius (1990) test are strongly supportive of the long-run relationship between
the monetary base and the three measures of money. However, the coefficient restrictions
(h>0 and β=1) are not rejected only in the case of the M2 multiplier. These results
contrast sharply with those reported in Al-Loughani and Moosa (1996) in the case of the
small open economy of Kuwait.
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4.1. Testing for Structural Stability

The stability of the money multiplier is important if authorities wish to use changes in the
monetary base to accurately predict changes in the money supply necessary to stabilize
economic activity. It is, therefore, important to test whether the coefficients of the
multiplier are insensitive to structural breaks. To this end, we have picked up five periods
from within the sample that mark significant currency events and regime changes in
Kazakhstan: (i) February 2009 when the tenge was devalued by 22% to make exports
competitive, (ii) March 2011 when the currency corridor mechanism was abolished and a
management float was adopted, (iii) September 2013 when the pegging solely to the U.S.
dollar was abolished to peg tenge to the basket of the U.S. dollar, Russian ruble and euro,
(iv) February 2014 when tenge was floated, and (v) August 20, 2015 when tenge plunged
to its record low losing 23% against the US dollar after the government floated tenge
renouncing its previously set corridor.

Chow and Predictive Failure tests are employed to test the multiplier stability in a
dynamic framework. To test the stability of the multiplier in a dynamic framework, an
error-correction model is constructed normalizing on the money stock as follows:
n n
∆mt = α + ∑ β i ∆mt −i + ∑ γ i ∆bt −i + θu t −1 + υ t (10)
i =1 i=o

where the coefficient of the lagged error term extracted from the OLS estimate of the
static multiplier model, as represented by equation (9), measures the speed of adjustment
towards the long-run equilibrium. Since all the variables underlying equation (10) are
stationary, it follows that the conventional standard errors and t-statistic can be used to

10
 make inference against the coefficients of the error-correction model. Three error-
correction models are constructed involving M1, M2 and M3, since the results of the
Johansen-Juselius (1990) confirm a strong long-run relationship between the monetary
base and the underlying measures of money. Using the general to specific modeling
approach of Hendry (starting with n=12), the OLS estimates of three parsimonious error-
correction models, together with statistical tests statistics, goodness of fit and diagnostic
test statistics, are reported in Table 4. These results can be summarized as follows. First,
the M1 error-correction model passes all diagnostic tests: serial correlation (SC),
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functional form (FF), normality (NT) and homoscedasticity (HT) tests. The short-run
dynamics in the M1 error-correction model are dominated by the autoregressive process
in both M1 and B, since all the lagged M1 and B terms are significant. The coefficient of
the error-correction term suggests that 7% of the deviations from the M1 multiplier are
corrected each month, implying that it takes around 14 months to restore equilibrium
between M1 and B. Second, the M2 error-correction model also passes all the diagnostic
tests, except the normality test because of the outliers in the sample. The short-run
dynamics in the M2 error-correction model are also dominated by the autoregressive
terms both in M2 and B. The adjustment process, however, seems to be a bit slower in the
M2 error-correction model. In this case, only 6% of the deviations are corrected each
month, implying that it takes around 17 months to restore equilibrium between M2 and B.
Third, the M3 error-correction model does not pass two diagnostic tests such as NT and
HT. Moreover, the short-run dynamics are dominated by the autoregressive process of
M3. The speed of adjustment is even slower (5%) in the case of the M3 error-correction
model. Fourth, it is important to note that contemporaneous changes in the monetary base
significantly affect changes in the money stock. Finally, it is worth noting that both the
broad money multipliers are structurally stable, since the estimated M2 and M3 error
correction models pass the Chow and Predictive Failure tests, as reported in Table 5.
However, the M1 multiplier does not pass the Predictive Failure test. The structural
stability of M2 and M3 multipliers is also supported by unit root tests. The results based
on both unit root tests, as reported in Table 1, show that while both M2 and M3
multipliers are stationary in level, the M1 money multiplier is not. This implies that M2

11
 and M3 multipliers are structurally stable (that is mean- reverting) over the sample
period.
5. Conclusion
This paper has examined the existence of a stable money multiplier in Kazakhstan. The
results of three tests of cointegration are strongly supportive of the money multiplier
when broad money is used rather than when narrow money is used. Not only is the null of
no cointegration between the money stock and monetary base rejected on the basis of
these tests but also are the coefficient restrictions (h>0 and β = 1 ) not rejected.
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The results also show that both the time series representing M2 and M3 multipliers are
stationary, implying that broad money multipliers are stable over the sample period.
These results are strongly supported by those based on Chow and Predictive Failure tests
of stability when they are applied to dynamic multiplier models of M2 and M3.
Conclusions and some implications that emerge from these results are described as
follows.
1. There is a strong long-run relationship between broad money supplies (M2 and M3)
and the monetary base. This implies that the broad money multiplier exists in
Kazakhstan in the long run.
2. The M2 and M3 money multipliers are stable in the long run, implying that
Kazakhstan can rely on monetary policy to control broad money by controlling the
reserve money.
3. Notwithstanding several regime changes and external shocks, the M2 and M3
multipliers turned somewhat stable when examined on the basis of a dynamic model.
4. The M2 multiplier performs better than the M3 multiplier, implying that M2 can
serve as a better and an effective mechanism for monetary policy to stabilize the
economy.

Acknowledgement

The authors of this article have not made their research dataset openly available. Any enquiries
regarding the dataset can be directed to the corresponding author.

12
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 Figure 1: The Monetary Aggregates and Monetary Base

24,000,000

20,000,000

16,000,000

12,000,000

8,000,000
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4,000,000

0
94 96 98 00 02 04 06 08 10 12 14 16

M1 M2 M3 MB

1
 Figure 2: The M1, M2 and M3 Multipliers
K1
1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8
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0.7

0.6
2000 2002 2004 2006 2008 2010 2012 2014 2016

K2
3.6

3.2

2.8

2.4

2.0

1.6
2000 2002 2004 2006 2008 2010 2012 2014 2016

K3
5.0

4.5

4.0

3.5

3.0

2.5

2.0
2000 2002 2004 2006 2008 2010 2012 2014 2016

2
 Table 1: Testing for Unit Root
Variable ADF PP
Level First Difference Level First Difference
m1t -1.19 -2.72 -1.75 -16.42*
m2 t -2.23 -16.43* -2.11 -16.16*
m3 t -3.78* -17.22* -3.39 -16.76*
mbt -1.49 -17.52* -1.47 -17.54*
k1t -2.34 -16.67* -2.13 -17.00*
k 2t -3.72* -3.52*
k 3t -3.84* -3.64*
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* Significant at the 1% level. Critical values for ADF and PP tests are 2.88 and 3.46 respectively.

Table 2: Results of Residual-Based Cointegration and Coefficient Restrictions Tests

M1 M2 M3
β0 (se) 1.605 (0.224) 0.509 (0.208) 0.818 (0.221)
β1 (se) 0.894 (0.016) 1.025 (0.015) 1.027 (0.016)
R2 0.985 0.989 0.99
CRDW 0.165 0.256 0.218
EGτ (p-values) -3.03 (0.107) -3.80 (0.016) -3.65 (0.000)
EGµ (p-values) -17.52 (0.085) -27.11(0.010) -24.06 (0.000)
Zτ (p-values) -2.91 (0.139) -3.64 (0.024) -3.44 (0.024)
Zµ (p-values) -15.98 (0.116) -24.80 (0.017) -20.99 (0.021)
tβ1 -6.63* 1.67 1.69
p-values and se, which are corrected on the lines suggested by West (1988), are given in the parentheses;
*is the 1% significance level.

Table 3: Results of the Maximum Likelihood Method of Cointegration

M1 M2 M3
β0 (se) 3.811 (1.060) 1.805 (0.548) 3.709 (0.745)
β1 (se) 0.770 (0.075) 0.954 (0.038) 0.860 (0.051)
Max Test
π =0 20.30* 27.11* 35.08*
π <1 6.20 8.94 8.68
Trace Test
π =0 26.50* 36.05* 43.76*
π <1 6.20 8.94 8.68
tβ1=1 -3.06* -1.21 -2.75*
* Significant at the 1% level

3
 Table 4: Results of the Error-Correction (Dynamic) Model
M1 M2 M3
constant 0.01(2.24) 0.01(3.32) 0.01(5.05)
∆mt-3 0.17 (2.74) 0.18(2.98) 0.21(3.72)
∆mt-9 0.18 (3.34)
∆mt-12 0.25(4.41) 0.18(2.82)
∆bt 0.28(7.55) 0.21(6.20) 0.25(9.41)
∆bt-3 -0.13(-3.10)
∆bt-7 -0.11(-2.14) -0.07(-2.25)
∆bt-8 -0.08(-2.14)
ut-1 -0.07(-3.60) -0.06(-3.28) -0.05(-3.15)
R 2 0.54 0.32 0.36
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DW 2.04 1.97 2.13

SC(12) 9.46 8.83 7.59
FF(1) 1.66 0.41 1.05
NT(2) 1.08 20.47 30.97
HT(1) 0.00 0.32 7.83
t-values are given in the parentheses.

Table 5: Testing Money Multiplier Stability (Dynamic Model)

Break points Chow test Predictive failure test
Narrow Money (M1)
2009m2 0.92(9,179) 1.22 (100,88)
2011m3 1.24(9,179) 1.48* (75,113)
2013m9 0.62(9,179) 1.64*(45, 143)
2014m2 0.61(9,185) 1. 73*(40,148)
2015m8 0.62(9,185) 1.28 (22,166)
Broad Money (M2)
2009m2 0.94(6,185) 0.52 (100, 91)
2011m3 0.40(6,185) 0.56(75, 116)
2013 m9 0.65(6,185) 0.79 (45,146)
2014m2 0.82(6,185) 0.89(40,151)
2015m8 0.62(6,185) 0.81(22,169)
Broad Money (M3)
2009m2 1.78(4,198) 0.45 (100,102)
2011m3 0.71(4,198) 0.49 (75,127)
2013m9 0.54 (4,198) 0.44 (45,157)
2014m2 0.91 (4,198) 0.61(40,162)
2015m8 0.87(4,198) 0.73(22,180)

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