VARIATIONS IN THE BANKING MULTIPLIER AND BASE MONEY: IMPLICATIONS FOR MONETARY POLICY IN THAILAND
The problem of monetary policy implementation is how to manipulate policy so that the ultimate objectives can be achieved. Unfortunately, due to incomplete information about the structure of the economy, the monetary authorities' policy actions are unable to directly influence the ultimate objectives. The money supply, however, is one of the important economic variables that links policy instruments to the ultimate objectives. Thus, it is necessary for the policymakers to understand how the money supply is determined. The money-multiplier model helps explain the determination of the money supply because it incorporates both policy and nonpolicy factors that affect the behavior of the money supply. This dissertation addresses the usefulness of the money-multiplier model as a guide to monetary policy in Thailand. The model is developed based upon economic factors and the institutional structural of the Thai economy. To utilize this model as a guide to policy, the banking multiplier must be shown to be either stable or predictable or both. Thus, this dissertation provides empirical evidence on the predictability and stability of the banking multiplier. Predictability refers to the ability of a model to forecast the behavior of the multiplier. Stability means a strong relationship between base-money growth and money-stock growth. In addition, we examine the structure and activity of the Thai government security markets in connection with open-market policy. The findings of this dissertation provide support for the predictability of the banking multipliers. In regard to the stability of the banking multiplier, the bulk of the evidence exhibits a strong link between base-money growth and money-stock growth in the long run. In the short run, however, there is some evidence indicating the dominance of banking-multiplier movements in explaining money-stock movements. But, since the multipliers are predictable, then there is little reason not to adopt the money-multiplier model as a guide aid for monetary policy in Thailand.
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