The dynamics of money supply determination under asset purchase programs: A market-based versus a bank-based financial system

Abstract

This paper proposes a new analytical framework incorporating asset prices and bank credit to investigate the determination of the money supply. Based on multivariate time-series analyses, this paper provides the first evidence that central bank asset purchases, asset prices and bank credit are closely linked to the money supply. Strong evidence of clear differences in the dynamics of money supply determination between the U.S. and Japan has also been found. Firstly, the asset purchases of the Federal Reserve tend to increase the money supply to a greater degree. Secondly, dynamic interactions between asset prices and the money supply are stronger in the U.S. And thirdly, bank credit is more essential to the determination of the money supply in Japan. These findings provide new insights into how financial structure influences the transmission mechanism of unconventional monetary policy.