Abstract

The Portfolio-Behavior of the Non-Banking Public and the Total Money Supply

If reserve ratios are given, the value of the money multiplier critically depends on how the public wants to divide its money holdings between the various components of the total money supply. As the regression equations presented above indicate, these portfolio decisions mainly hinge on variables like relative prices, market interest rates, real wealth, and real income. The domestic money supply, therefore, not only varies in response to changes in the volume of base money or toa shift in the minimum reserve requirements set by the central bank, but it is also positively correlated with movements in real wealth and inversely correlated with movements in real income or in the level of market interest rates. Its reaction to changes in relative prices, however, cannot be predicted precisely, because in this case there are two effects pointing into opposite directions either of which may dominate