A study of the determinants of the money supply in Thailand

Abstract

In past decades, several economists have investigated the determinants of the money supply. They found that the money stock was influenced by both exogeneous and endogeneous factors to the economic system. They have shown that changes in the money stock are a reliable summary measure of the effect of monetary policy actions on economic activity. It was suggested that, by controlling the growth rate of money supply, the monetary authority could achieve it's policy targets. The purpose of this study is to investigate the behavior of the determinants of the Thai money supply and the various factors that affect them. A simple model of the money supply from basic definitions was constructed. It shows the relationship between the stock of money and its three determinants - the high-powered money stock, the reserve ratio and the currency ratio. Through a simple transformation we can express the rate of change in the money stock as the summation of three terms related to the rates of change in each of the determinants. It was found that the average change in high-powered money accounts for approximately 86 percent of the change in the total money stock while the average contributions of the reserve ratio and the currency ration are -.58 and 15 percent respectively. Time series analysis using both ordinary least squares and the Hildreth-Lu scanning technique was conducted to investigate factors influencing each of the three determinants.