A Note on Money Creation in Emerging Market Economies
23 Pages Posted: 18 Mar 2016
Date Written: March 15, 2016
This paper discusses the money creation mechanisms in emerging markets with special focus on external transactions. We argue that one should not rule out the possibility that fluctuations in the loans-to-deposits and non-core liabilities ratios are driven by the banks. We also argue that, under a flexible exchange rate regime in which the central bank is not trying to accumulate foreign reserves, external transactions are unlikely to contribute significantly to money growth. To make our argument, we analyze a historical episode of these flows in Korea and Russia and conduct a canonical correlation analysis for a cross-section of emerging market economies.
Keywords: Money supply, non-core liabilities, loans-to-deposits ratio, emerging markets
JEL Classification: E51, F30, G21
Suggested Citation: Suggested Citation