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The Money Multiplier for The Bahamas

Published Tuesday October 31st, 2000

Using quarterly data for the period 1990 to 2000, this brief analyzes estimates of the money multiplier for The Bahamas. The multiplier has particular relevance for monetary policy, because it establishes a link between the monetary base or high powered money, which the central bank is in a position to influence and money supply changes that impact interest rates and real economic variables. The overall conclusion is that the multiplier exhibits significant seasonality, related almost entirely to quarterly shifts in the public's holding of currency and fluctuations in banks' excess reserves. Given the small size of the short run multiplier however, the impact of seasonality is much less important than the high level of autocorrelation of quarterly changes in the average money supply. In the absence of the restrictive monetary policy stance, the data suggest that the multiplier would have continued to increase over the course of the 1990's, in line with the proportionally reduced level of currency in active circulation. While there is scope to incorporate the multiplier in policy programming exercises the central bank has to be considerate of the current regulatory structure and depth of the financial system as this has implications for the evolution of the multiplier over the medium term.

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