Explaining the Change in the Money Multiplier (in Japanese)

Japan has experienced prolonged economic stagnation throughout the 1990s and beyond. The government's monetary policies do not to seem to have been effective in eradicating deflation and increasing the money supply. A decrease in the money multiplier is said to be one reason for this. This paper will explain why the money multiplier declined in the 1990s, and explore the measures to increase it. First, we break down the change in the money multiplier by the cash-holding propensities of banks, non-financial institutions, and households. Second, we explain the change in the multiplier by using the Bailey-Friedman hypothesis and the Mitchell-Hawtrey hypothesis in a VAR model. In addition, we use the expected inflation rate as an additional variable, because the nominal interest rate has hovered around zero after the end of 1990s. We obtained the following conclusions. First, the decrease of the money multiplier in the 1990s was explained by the fact that the propensity of households to hold cash was extremely large. Second, the expected inflation rate had a significant influence on the money multiplier both in the 1990s and 1980s. Third, the amount of bad loans also had a significant influence on the change in the money multiplier in 1990s. That influence, however, could be quantitatively negligible.