THE REGIONAL COMPOSITION OF THE MONEY MULTIPLIER PROCESS
| Published date | 01 February 1982 |
| Author | Sheila C. Dow |
| Date | 01 February 1982 |
| DOI | http://doi.org/10.1111/j.1467-9485.1982.tb00434.x |
Scoftish
Journal
of
Poolitical
Economy,
Vol.
29,
No.
I,
February
1982
0
1982
Scottish
Economic
Society
003~9292/82/0002~
1602.00
THE
REGIONAL COMPOSITION
OF
THE
MONEY MULTIPLIER PROCESS
SHEILA C.
DOW*
University
of
Stirling
I
INTRODUCTION
A
significant element of Keynes’ macroeconomic theory which has received
surprisingly little attention at the theoretical level is his recognition of the
importance of the composition of national aggregates.’ Regional economists
have focused attention on the importance
of
that composition for the regional
distribution of income and employment. But discussion
of
the relevance
of
that
distribution
for
national developments has been conducted very much on the
sidelines.’
In turn, while Keynes emphasised the crucial role of money at the national
level, this role has not been transposed into the subnational framework of
regional economics. While much of regional economics is Keynesian in its use
of
multiplier analysis, little reference is made to a regional role for money, on
the grounds that money supply is endogenous at the regional level.3
The purpose here is to address both
of
these questions together: the
question of whether money does have a role to play in determining the
regional composition
of
income and employment, and the question of whether
regional financial conditions can affect national monetary aggregates, and
thus national income and employment. In short, to borrow Friedman’s
epithet, does it matter regionally and/or nationally where exactly the
helicopter drops its banknotes?
These questions have already been addressed in
a
very similar context, i.e.
with respect to money creation and distribution among groups of countries.
Thus, global monetarists argue that,
in
the
long-run,
money has no effect on
output and that a money supply increase in one country has the same outcome
in terms
of
the level and distribution
of
nominal international aggregates as
would the same increase occurring in another co~ntry.~ The Keynesian
counter argument refers to the short-run effects of monetary developments on
*This article has benefited from the helpful comments and suggestions
of
Professor
T.
Wilson,
’
See Keynes (1936) chapter
24
and Keynes (1937).
Professor
M.
Gaskin,
P.
Hare and
P.
Andrews.
The regional composition
of
the labour market has been suggested as determining the position
of
the Phillips curve. See for example Schofield
(1974)
for a recent contribution to this area.
See Dreese
(1974)
for a survey
of
the role
of
money in the regional economics literature.
See, for example, Mundell(l977).
Date
of
receipt of final manuscript
:
20
May 1981.
22
COMPOSITION
OF
THE MONEY MULTIPLIER PROCESS
23
individual countries, and the implications of the resulting changes in relative
competitiveness for the distribution
of
income and employment in the long
run.5
In order to translate this debate into a regional context, a multiplier
framework is employed here. This has the advantage of being
a
framework
common both to monetary analysis and regional income analysis, allowing
some basis for a regional monetary analysis. While money multipliers are
conventionally rejected by non-monetarists because they tend to conceal
portfolio behaviour, portfolio analysis can be introduced into a multiplier
framework.6 This will be done to a limited extent when changing regional
expectations are introduced. The resulting coefficient adjustments during the
multiplier process also represent an attempt to avoid the pitfalls of “timeless”
income
multiplier^.^
The major difference between the international and interregional contexts is
an institutional one. In particular, there is an institutional distinction between
the banking systems
of
different countries, but not necessarily between those
of
regions within a country. With the growing international character of
banking, the national distinction is becoming less marked,
so
that the
differences are more of degree than of kind, the degree being less between, say,
the
U.S.
regional banking structure and the international than between the
U.K.
nationwide banking structure and the international. But these differences
can be expected to be reflected in the portfolio behaviour of regional banks,
and particularly the role of reserve assets. The implications of these differences
will
be drawn from the multiplier analysis.
Section I1 discusses the use of money multipliers in a regional context, while
Section I11 considers Tsiang’s
(1978)
more general multiplier analysis, which
refers to financial sectoral composition, but may be adapted to regional
composition. While Tsiang concludes that the compositional outcome of
reserves diffusion is independent of the process of diffusion,
a
counter-
argument is presented in Section IV. On the basis
of
this argument that short-
run processes are significant, Section V concentrates exclusively on alternative
short-run reserves diffusion processes. By tying these short-run multipliers
into an income multiplier framework, the influence
of
short-run regional
financial developments on regional and national income is demonstrated in
Section
VI.
The multiplier models are all developed in a simple two-region
context, where one region is developed or Central both in real and financial
terms, and the other is underdeveloped or Peripheral in both terms.
The model refers primarily to banking systems where banks’ portfolio
structures are regionally separable. In Section VII, the theory is discussed in
the context of national branch banking systems, and some tentative conclu-
sions are drawn as to its applicability. Some policy conclusions are suggested
in Section VIIT, the concluding section.
This position was set out in the
U.K.
Green Paper (1978) on the European Monetary System.
See Goodhart (1975, pp.
129-136)
for
a discussion
of
the relationship between the multiplier
See Robinson
(1
964,
p.
75)
for
a
discussion
of
Keynes’multiplier concept in a temporal context.
and portfolio approaches.
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