Is the Money Supply Endogenous or Exogenous? A Panel Data Investigation of Developing Asian Countries

Abstract This study investigates whether the money supply (MS) is endogenously or exogenously determined in 10 developing Asian countries. The study implemented the Panel FMOLS, DOLS, and ARDL/PMG approaches with quarterly panel data from 1980Q1 to 2020Q4. The results reveal that bank lending and income positively influence the MS, while the inflation rate has a negative impact. These findings support the idea that the MS is endogenously determined while rejecting the view of the Monetarists that the MS is exogenously determined or that there is a “helicopter drop” of money. Central banks should espouse a flexible approach to monetary policy that considers the broader economic environment. Recognizing the endogeneity of the MS can lead to more prudent strategies for achieving sustainable economic outcomes.