The money multiplier and competing theories of money creation: empirical validation for Russia

Cambridge Journal of Economics. 2025. Vol. 49. No. 2. P. 343–383.

Grishchenko V., Mihailov A., Tkachev V.

For decades, the monetary economics literature has considered multiple deposit expansion via the money multiplier as theoretically and empirically corroborated. However, the developments witnessed in advanced economies since the Global Financial Crisis challenged this settled view. We revisit it empirically in the context of the banking system of a big emerging market economy, Russia, from 2005 through 2019, also comparing our results to findings for the USA. In doing so, we review the theoretical underpinnings of money creation and propose an econometric test that is applied to the Russian case. Our contribution is to show that the credit theory of money — and not the fractional reserve theory or the financial intermediation theory — is the most supported by the Russian monthly data. We reach this conclusion employing a vector autoregression model and finding robust evidence that nowadays bank lending in Russia is constrained mainly by credit demand, as in the USA.

Keywords: денежно-кредитная политика, deposit multiplier, депозитный мультипликатор, денежный мультипликатор, мультипликация, Multiple deposit expansion, Money multiplier, Credit theory of money, Evolution of bank management, Monetary policy, кредитная теория денег, эволюция банковского менеджмента