The M1-M0 relation in Barbados: Some evidence in causality

Author(s): McClean, A Wendell (1998)

Created 22 Jul, 1998
Categories Working Papers
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A conventional approach to money-supply analysis assumes an exogenous monetary base and postulates a money-multiplier relationship between the endogenous money supply and the monetary base. This approach has been inspired by the logic of closed economy analysis and is applicable to the case of an open economy with a floating exchange rate regime. However, some researchers have applied the approach to a small economy with a fixed exchange rate regime. This author has argued against the use of conventional money-multiplier analysis in the context of a small economy with a fixed exchange rate regime, on the grounds that, in such an economy, the money supply and monetary base are both endogenous variables. This view is predicated on the notion that the demand for money function takes precedence over the portfolio-balance relation that links demand for money and the monetary base. In this study, we provide some empirical evidence, for Barbados, on the causal relationship between the narrow money supply (M1) and the monetary base (M0) that supports this view.

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