Title: Existence of the money multiplier in a developing economy: a case of Saudi Arabia

Authors: Razzaque H. Bhatti; Nassar S. Al-Nassar

Addresses: Department of Economics and Finance, College of Business and Economics, Qassim University, Buraydah, Saudi Arabia ' Department of Economics and Finance, College of Business and Economics, Qassim University, Buraydah, Saudi Arabia

Abstract: In this study, cointegration methods are used to test the existence of the money multiplier model in Saudi Arabia for 1997m1-2020m4 and subperiods before and after the 2008 global financial crisis. Residual-based tests support broad (M2 and M3) multipliers over the full sample and pre-crisis period, albeit the M3 multiplier performs better than the M2 multiplier. Johansen's vector autoregression (VAR) and Pesaran et al. (2001) autoregressive distributed lags (ARDL) cointegration and coefficient restriction tests reveal that broad multipliers perform well. Narrow and broad multipliers are mean-reverting in the pre-crisis period, and the M3 multiplier is mean-reverting over the full sample. These multipliers are stable in a dynamic framework. Therefore, the Saudi Arabian Monetary Authority (SAMA) can control money stock and inflation by controlling base money. Narrow and broad multipliers are also predictable and broad monetary aggregates can influence monetary policy.

Keywords: monetary policy; money multiplier; bank credit channel; co integration; Saudi Arabia.

DOI: 10.1504/IJEED.2023.129894

International Journal of Education Economics and Development, 2023 Vol.14 No.2, pp.231 - 251

Received: 26 Oct 2021
Accepted: 09 Dec 2021
Published online: 03 Apr 2023 *