Theoretical and empirical aspects of the credit multiplier, with special reference to Malaysia / Ungku Zeti Akhtar Ungku Abdul Aziz

Ungku Zeti Akhtar, Ungku Abdul Aziz (1970) Theoretical and empirical aspects of the credit multiplier, with special reference to Malaysia / Ungku Zeti Akhtar Ungku Abdul Aziz. Undergraduates thesis, Universiti Malaya.

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Abstract

The revival of the interest in money supply as an important determinant of nation’s economic activity has shifted interests to quantities. Recently, Hilton Friedman was said to have ‘dragged’ the Federal Reserve System into a quantitative view of monetary developments. The famous Otto Eckstein is reported to have said that if it really is money supply that is to be regulated, there had better be agreement on the figures, who would rest a policy on so weak a statistical reed. It is implied from this that there has been some agreement amongst economists that quantities are important, but it also confirms the doubt, that there has been some disagreement as to what quantities to look at. This exercise is an attempt to make a quantitative analysis of how money supply is determined in Malaysia. The exercise is divided into three parts. Part I deals with the Theoretical aspects of the analysis. In this section, the actual quantities that shall be analysis are defined. An attempt is made to justify for having chosen such quantities. Justification was on the basis of that being most appropriate to take into account the institutional features existing in Malaysia. In other words, modifications were made to the conventional framework of the credit multiplier analysis so as to build a framework that is most appropriate for this country. In the second part of this exercise an attempt is made to test empirically, the credit multiplier for Malaysia within the framework built in Part I. The scope of the study includes an attempt to give some quantitative answers as to what actually - or, who actually determines money supply. That is, the behavior of commercial banks, the public and the Central Bank are assessed in an attempt to provide a quantitative answer as to the extent their behavior affects money supply. In the last part of this exercise, a summary is made of the major conclusions derived from the statistical analysis in Part II. The policy implications of some of these conclusions are briefly discussed and a note is made on further refinements that are possible. However, it is felt that parts of this study have been handicapped by the lack of adequate data for the entire period under review. This is largely due to the fact that, after the formation of Malaysia in September 1963, certain banking data for West Malaysia was not available. Although data for the whole of Malaysia stretches as far back as 1959, it should be noted that banking laws that applied in West Malaysia at that time did not apply to East Malaysia until after the formation of Malaysia. But, wherever possible, an attempt has been made to support the conclusions made with reliable data.

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