Discussion Papers In Economics
And Business

The long-run relationship between the Japanese credit and money multipliers

Mototsugu Fukushige

Discussion Paper 13-19

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANThe long-run relationship between the Japanese credit and money multipliers

Mototsugu Fukushige

Discussion Paper 13-19

August 2013

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANThe long-run relationship between the Japanese credit and money multipliers*

Mototsugu Fukushige†
Graduate School of Economics, Osaka University

Abstract
The standard argument is that while money creation and credit creation have different channels,
they provide the same theoretical size of multipliers. However, there is usually some differencein practice. Consequently, in this paper we investigate the long-run relationship between thecredit and money multipliers in Japan.
Keywords: Money Supply, Money Stock, Money Multiplier, Credit Multiplier
JEL Classfication: E51, E41, E42*

The author completed this research while visiting the College of Population Studies at
Chulalongkorn University. The author is most appreciative of the hospitality shown during thisvisit, especially by the Deputy Dean, Dr Worawet Suwanrada. The author also gratefully
acknowledges the financial support of the Zenkokuginkou Gakujutu–Shinkou Zaidan research
fund.
†

Corresponding to: Mototsugu Fukushige
Graduate School of Economics
Osaka University
1-7, Machikaneyama-cho
Toyonaka, Osaka, 560-0043
Japan
E-mail: mfuku@econ.osaka-u.ac.jp
11. Introduction
A standard argument is that while money creation and credit creation have different
channels, they provide the same theoretical size of multipliers. In practice, there is usuallysome difference owing to the coverage or definition of bank loans and monetary aggregates. To
explain this discrepancy in multipliers, Honda (2004) provides a theoretical case using a simple
T-account explanation to demonstrate the impact of the restriction of some banks in making
additional loans because of capital requirements. However, no empirical investigation isundertaken. Accordingly, if the theoretical conclusion is to be meaningful, there should be along-run relationship such that the money multiplier and credit multiplier are equal.
Following the asset bubble burst and the first Basel Accord in 1989, bank loans in Japan
shrank such that a so-called “credit crunch” took place and the credit multiplier fell
dramatically. This change implies that the above theoretical conclusion has no empiricalmeaning even if we are unable to find any evidence of a long-run relationship. In this paper, we
attempt to identify the long-run relationship between the credit and money multipliers andinvestigate the possibility of structural change using Japanese data.
The remainder of the paper is structured as follows. Section 2 discusses the trends in theJapanese credit and money multipliers. Section 3 conducts an empirical investigation using a
gradual switching model and Japanese data. Section 4 provides some concluding remarks.

2. Actual credit and money multipliers in JapanTo calculate the money and credit multipliers in Japan, we can obtain data from the Bankof Japan’s webpage (http://www.stat-search.boj.or.jp/index_en.html). For the money stock, we

2use the M1 and M2 series since January 2003. According to the Bank of Japan, the definitionsof these series are as follows.
M1: Currency in circulation + deposit money
where deposit money is defined as demand deposits (current deposits, ordinary deposits,
saving deposits, deposits at notice, special deposits, and deposits for tax payments) minus
checks and bills held by the surveyed financial institutions and all domestic depository
institutions (comprising the financial institutions surveyed for M2, the Japan Post Bank, theShinkumi Federation Bank, Shinkumi Banks, the Rokinren Bank, labor banks, Prefectural
Credit Federations of Agricultural Cooperatives, Agricultural Cooperatives, Prefectural
Credit Federations of Fishery Cooperatives, and Fishery Cooperatives).
M2: Currency in circulation + deposits
where the Bank of Japan limits the definition of deposits in this series to domesticallylicensed banks (excluding the Japan Post Bank), foreign banks in Japan, Shinkin Central
Bank, shinkin banks, the Norinchukin Bank, and the Shoko Chukin Bank) to maintainconformity with the previous definition of the M2 money supply.
Because of the change in the definitions of the monetary aggregates in January 2003, weare obliged to estimate M1 and M2 for the earlier period. By using the annual growth rate of theformer definitions of aggregate money supply, we estimate M1 and M2 from January 1980 to
December 2002. According to the Bank of Japan, the main differences in the definitions ofmoney stock and money supply are that in the M1 (money stock) series, securities companies,
Tanshi companies, and nonresidents are not included as money holders. In the M2 (moneystock) series, the main differences derive from the range of money holders included and theestimation method for some of the data. Apart from these differences, M2 (money supply) has
the same range of money issuers and financial assets (except for nonresident yen deposits). For
3M1 (money stock), the range of money issuers also differs from the M1 series (money supply)(in addition to the financial institutions surveyed for M1 in the former series, deposit money at
the Japan Post Bank and other financial institutions are included). For bank loans, we obtain
two types of aggregated bank loans: monthly average loans and discounts of all banks except
shinkin banks (available since July 1991) and loans and discounts of all banks including
shinkin banks (available after January 2000). We denote the former as L in this paper.

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Money Multiplier(M2)

Money Multiplier(M1)Credit Multiplier(All Banks)Credit Multiplier(All Banks and Credit Associations)Fig. 1 Trends in credit and money multipliers
Table 1. Results of unit root tests

WS
DF

WS
DF

WS
DF
Notes:

Test statistics
L/H
M1/H–1.84926–3.60676–3.09041–3.86077
p-values
L/H
M1/H
0.743230.014919
0.10853
0.013726
Number of lags
L/H
M1/H
26
26
26
26
WS and DF are the weighted symmetric and Dickey–Fuller’s

4

M2/H–2.79339–2.87852
M2/H
0.146910.16960
M2/H
26
27
tests, respectively.

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Fig. 2 Trends in M2/M1

Fig. 1 plots the credit and money multipliers which are the ratios of M2 and bank loan
to the monetary base (H), which is also called base money or high-powered money. One of
the most interesting features we can see is the trend in the credit multiplier. In the early 1990s,
the credit multiplier was almost the same size as the M2 money multiplier; by the early 2000s,
the credit multiplier had fallen below the M1 money multiplier. Based on the unit root tests inTable 1, both the ln(L/H) and ln(M2/H) series have a unit root, but after April 2002, the ratio ofthese two series to the M1/H appears more stable, as shown in Fig. 2. This suggests a structuralchange in the relationship. Furthermore, this structural change may have been gradual, andln(L/H) and ln(M2/H) may have correspondingly changed their properties from anonstationary to a stationary time series. To consider these possibilities, in the next section, we
use a vector error correction model (VECM) with gradual switching to analyze the relationshipbetween these series.

53. Gradual changes in the long-run relationshipIn this section, we apply a gradual switching regression. This method was originallyproposed by Ohtani and Katayama (1985) and Ohtani, Kakimoto and Abe (1990) andsubsequently modified by Konno and Fukushige (2002). In estimating this model, we first
introduce the following dummy variables for the gradual changes in the constants and thecoefficients:

−
−

+
+

and search for the starting and end points (and) using the maximum likelihood method.

In the present analysis, I apply this approach to the VECM as follows:

( )
[
[

(

)

][

( )

−

+

−

+

(

)

]

]

+
+

+ ∑[

( )
]

+[
[

(

)

]

]

where we assume the gradual switching occurs in the coefficients for M2/H. For the estimation,
we used monthly data from September 1992 to July 2011, fixed the lag length (S = 6), andsearched for the starting point ( ) between January 1995 and December 1998, and for theendpoint ( ) between January 1995 and April 2008.
6

Table 2 presents the results of the estimation. We omit the estimated coefficients for the
lagged explanatory variables. In Model 1, the constant term is not statistically significant, so
we remove it and estimate Model 2. All of the estimated coefficients in Model 2 are statisticallysignificant. The estimated starting point for the gradual switching is September 1991, and theendpoint is April 2002. The estimated long-run relationship before January 1997 is:Table 2. Empirical results and long-run relationships
Model 1Long-run relationship
Constant

M2/H
M2/H

Model 2–0.2345(–0.706)–0.88777*(–2.117)
1.0998(8.381)0.143921(0.815)―–1.21386**(–12.0698)
1.00835(317.875)
0.276492(5.526)0.430884(4.586)0.02483
0.33291.964

0.46264(5.700)0.024960.32571.975

0.398081(4.503)0.02376
0.2981
1.964
January 1998
February 2007

0.444318(5.745)0.02375
0.2985
1.976
January 1997
February 2007

L/H equation

S.E. of Regression
R-squared
DW Ratio
M2/H equation

S.E. of Regression
R-squared
DW Ratio

Notes:

t-values in parentheses.
S.E. of Regression and DW Ratio are the standard errors of the regression and the Durbin–
Watson ratio, respectively.
** and * indicate statistical significance at the 5% and 1% level, respectively.

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Money Multiplier(M2)Long-run Money Multiplier ( implied by L/H )May-11

Jan-11

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( )

(

)

and after March 2007 is:

( )

(

)−

Fig. 3 presents the actual and estimated long-run multipliers. As shown, the actual multipliers
follow the estimated long-run multipliers, suggesting a long-run equilibrium, or convergencein levels.
This result shows that before January 1997, the relationship between the credit andmoney multipliers is quite similar to the theoretical conclusion. However, after March 2007,
the credit multiplier became more sensitive to the money multipliers, and this meant that the8credit multiplier fell below the money multiplier. As Honda (2004) suggested, when capitalrequirements restrict the lending of some banks, the credit multiplier becomes less than themoney multiplier. Our result indicates the realization of Honda’s (2004) assumption in theJapanese economy.

4. Concluding remarks
From Fig. 1 and Table 2, we can conclude that there is a long-run relationship between
the credit and money multipliers in Japan but that a structural change in this long-run
relationship took place between 1991 and 2007 such that the credit multiplier became less thanthe money multiplier. This result accords with the theoretical argument in Honda (2004).
During this period of gradual change, the Basel Accord was introduced into the Japanese banksystem, and the so-called “credit crunch” arose. Honda (2002), Ito and Sasaki (2004) and
Watanabe (2007), among others, have likewise investigated the effects of these changes.
However, almost none of these studies investigated the changes in the credit and/or money
multipliers. Using our empirical analysis, we identified a new empirical feature associated withthe shrinkage of the loan market in Japan linked with two kinds of changes. The first is thedecline in the M2 money multiplier itself. The second is the structural change in the long-run
relationship between the credit and money multipliers. The former potentially depends on themacroeconomic shock and its effect in shrinking the total size of bank deposits. The latter
implies that the behavior of banks changed through the introduction of the capital requirementsin the Basel Accord. We require further and separate theoretical and empirical study of thesechanges in order to investigate their effects more closely.

9References
Honda, Y. (2002) The Effects of the Basel Accord on bank credit: The case of Japan, Applied
Economics, 34, 1233–1239.
Honda, Y. (2004) Bank capital regulation and the transmission mechanism, Journal of Policy
Modeling, 26, 675–688.
Ito, T. and Sasaki, Y.N. (2004) Impacts of the Basel capital standard on Japanese banks,
Journal of the Japanese and International Economies, 16, 372–397.
Konno, T. and Fukushige, M. (2002) The Canada–United States bilateral import demand
function: Gradual switching in long-run relationships, Applied Economics Letters, 9,567–570.
Ohtani, K. and Katayama, S. (1985) An alternative gradual switching regression model and its
application, Economic Studies Quarterly, 34, 148–153.
Ohtani, K., Kakimoto, S. and Abe, K. (1990) A gradual switching model with a flexible
transition path, Economics Letters, 32, 43–48.
Watanabe, W. (2007) Prudential regulation and the “credit crunch”: Evidence from Japan,
Journal of Money, Credit and Banking, 39, 639–665.

10Appendix

Post estimation period

We estimated the long run relationships by the monthly data from September 1992 toJuly 2011. After July 2011, there existed several political changes. Most recent one is thechange in administrations by the Liberal Democratic Party in December 2012. So-called“Abenomics” was introduced and the Governor of Bank of Japan was changed to Mr. Kuroda
in March 2013. The estimated results in this paper might be affected by the “so-called”
Kuroda’s Bazooka, so we check some relationships in this Appendix.
It is clearly show in Fig A1 that the Kuroda’s Bazooka increased the Japanesemonetary base drastically.

In Fig A2, the money and credit multipliers fall down rapidly

according to the increases of monetary base. However, also in Fig A2, our estimated longrun relationship in section 3 is still stable.

If Mr. Kuroda aims to increase the bank lending

as a final target, more drastic increase of monetary base might be needed.
1800000
1600000
1400000
1200000
1000000
800000600000400000200000Fig. A1 Monetary base after April 201111

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