Money multiplier as an effective instrument for

Ukraine’s sustainable growth

Mykhailova Iryna

Ukraine has problems in economic growth

20132014

2015

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GDP per capita, USD

Gross domestic product (GDP) is a monetary measure of the value of all final goods and services produced in a period (quarterly or yearly).

Increasing GDP=increasing citizen’s welfare

How can we increase the level of GDP?• Produce more goods and services• Increase economic activity• Improve economic situation

Do we have any other options?

• GDP=P*Q,P - average level of prices on goods and services;Q - the physical volume of goods and services sold in the period.

•According to Fisher equation M*V=P*QM – average money supply in circulation for the period;V- the rate of turnover of money.

• M = Mb*mMb - monetary base;m – level of money multiplier.

Mb*m*V=P*Q

Mb*m*V=P*Q

↑PQ if:• ↑Mb• ↑m• ↑V

Which of variable equation should we increase?In current situation the best decision is increasing money multiplier.

How does money multiplier work?• Money multiplier measures the maximum

amount of commercial bank money that can be created by a given unit of central bank money.

100 10 90 9

Bank 1 Bank 2

Level of money multiplier in Ukraine

Year М3, million UAH Monetary base Multiplier GDP per capita, USD [1]

2004 92 38 2,42 1367

2005 125 53 2,36 1828

2006 194 82 2,37 2303

2007 261 97 2,69 3068

2008 396 141 2,81 3891

2009 515 186 2,77 2545

2010 487 194 2,51 1974

2011 597 225 2,65 3570

2012 685 239 2,87 3856

2013 773 255 3,03 4030

2014 908 307 2,96 3014

M3=Monetary base * multiplierMultiplier =M3/Monetary base

2004 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

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Correlation between GDP and multiplier

GDP Multiplier

Little changes in multiplier lead to big changes in GDP. As a result, we can influence on multiplier

effect to stimulate the increase of GDP.

CountryGDP per capita,

USD 2014

M0, 2014

M3, 2014

Mo/M3*100

%Unit

M0, M3

1 Luxembourg 97,661.9 2,50 270 0,93 EUR Billion

2 Singapore 82,763.4 31000 510000 6,08 SGD Million

3 United Arab Emirates

67,674.1 64000 1230000 5,20 AED Million

4 Switzerland 57,235.3 390000 890000 43,82 CHF Million

5 Hong Kong , China

55,084.3 340000 10000000 3,40 HKD

Million

6 Saudi Arabia 51,924.4 350000 1580000 22,15 SAR Million

7 Netherlands 47,662.5 48000 790000 6,08 EUR Million

CountryGDP per

capita, USD 2014

M0, 2014 M3, 2014Mo/

M3*100%

Unit M0, M3

1 Romania 19,401.3 35000 240000 14,58 RON Million

2 Poland 24,744.5 160000 980000 16,33 PLN Million

3 Serbia 12,659.7 117000 1700000 6,88 RSD Million

4 Thailand 15,735.1 1190000 18000000 6,61 THB Million

5 Slovenia 29,962.7 4030 19400 20,77 EUR Million

6 Slovakia 27,711.5 9000 46500 19,35 EUR Million

Comparing rate of multiplier and share of cash (M0) in some countries with the highest rates of GDP per capita

Comparing rate of multiplier and share of cash (M0) in some countries with the GDP per capita 12000-27000 USD

M0/M3 in Ukraine

Year М3, million UAH

Mo, million UAH Mo/M3*100%

2004 92 31 33,70

2005 125 42 33,60

2006 194 60 30,93

2007 261 74 28,35

2008 396 111 28,03

2009 515 154 29,90

2010 487 157 32,24

2011 597 182 30,49

2012 685 192 28,03

2013 773 203 26,26

2014 908 237 26,10

In Ukraine, average indicator M0/M3 is approximately 29%.It means that significant part of money does not participate in multiplier process. This situation can be changed by increasing the part of electronic payments and using payment cards by citizens.

Conclusion

• Results of the research have shown that increasng multiplier is a good way for increasing welfare.

• Each of us can help Ukraine’s economy by using…

Thank you for attention!

Q&A