## 5. Main Results: Multivariate Regressions

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### Introduction and research question
- Focus: long-run determinants of monetization (broad money / nominal GDP) across low- and middle-income countries.
- Key empirical question: Why do some emerging countries experience steady increases in monetization while many low-income countries experience demonetization or reversals?
- Sample: 34 low- and middle-income countries; sample period 1973−2005; unbalanced panel.

### Literature overview — hypothesized determinants
- Macroeconomic factors:
  - Real deposit rates: higher real deposit rates are expected to increase monetization (mechanisms: discourage holding nonmonetary assets; substitution toward monetary assets).
  - Inflation and inflation expectations: higher inflation (or higher expected inflation) may reduce monetization via stronger incentives to hold real assets as inflation hedges.
  - Central bank financing of fiscal deficits: expected to depress demand for money (via higher expected inflation and credibility effects).
- Demographic/geographic factors:
  - Urbanization and rural population shares: rural population and geographic barriers can reduce financial deepening and monetization.
- Financial sector reforms and liberalization:
  - Financial liberalization, banking reforms, and institutional/legal improvements are linked to greater financial depth; capital account openness may affect monetization in either direction.
- Growth channel:
  - Monetization contributes to financial sector development, which supports growth through improved allocation of capital, monitoring, risk diversification, mobilization of savings, and reduced transaction costs.

### Empirical model and data
- Dependent variable: monetization ratio = broad money / nominal GDP (log transformed).
- Main explanatory variables:
  - log(per capita real GDP);
  - real bank deposit rate;
  - inflation expectations (alternatively current inflation, one-period-ahead inflation, or central bank credit to government);
  - % rural population;
  - capital account openness dummy;
  - financial reform index.
- Countries: selection based on data availability (particularly financial reform index).
- Descriptive notes:
  - Inter-group variation: average monetization higher in MENA and Emerging Asia (EA); Sub-Saharan Africa (SSA) lags.
  - Time-series heterogeneity: examples include steady increases (Bangladesh, China, Morocco) vs volatile patterns (Algeria, Kenya, Uganda).

### Estimation methodology
- Panel unit root tests: mixed evidence on stationarity; some series clearly nonstationary (log per capita income, monetization).
- Pedroni (2004) panel cointegration tests: group ADF and panel ADF decisively reject null of no cointegration in estimated specifications.
- Chosen estimator: Pooled Mean Group (PMG) estimator based on ARDL specification (allows heterogeneous short-run dynamics, homogeneous long-run coefficients).
- Model estimated in error-correction form; lag order chosen by Schwartz Bayes Criterion.
- Long-run coefficients constrained common across countries; short-run coefficients and error-correction speeds allowed to vary.

### Main multivariate regression findings (long-run coefficients and significance)
- From Table 5, specification 6 (final specification reported):
  - Log (Per Capita Real GDP): 0.331*** (0.088)
  - Capital Account Openness: 0.138*** (0.049)
  - Log (Net Credit / GDP): 0.021 (0.014)
  - Real Bank Deposit Rate: 0.016*** (0.002)
  - Financial Reform: 0.166* (0.098)
  - Error Correction Term (φ): -0.20***
  - Observations: 664
  - Hausman Test Statistic: 2.98
- Earlier specifications (Table 5) consistently show:
  - Log per capita real GDP and capital account openness are positive and often highly significant across specifications.
  - Net credit from monetary authority to government (log) is negative and significant in some specifications (e.g., columns 1–3) but its negative association disappears once financial reform is included (column 6).
  - Inflation expectations show negative and significant association in some specifications (e.g., column 3 where Inflation Expectations = -0.004*** (0.001)).
  - % of Rural Population is not significant in the reported specification where it is included.

### Magnitude and economic interpretation
- Semi-log model interpretation:
  - Coefficients on log(per capita GDP) and log(net credit/GDP) → average effect of a 1 percent change in the variable on the percentage change in monetization.
  - Coefficients on percentage variables (real deposit rate, inflation, etc.) → average association of a one percentage point deviation from the mean with monetization.
  - Financial reform index: interpret by multiplying estimated coefficient by the sample standard deviation.
- Reported magnitudes (textual statements from the chapter):
  - A 1 percentage point increase in the real deposit rate (from its mean value of -1.42 percent) is associated with a 2.2 percent increase in the monetization ratio on average.
  - An increase in the financial reform index by one standard deviation (reported both as 0.26 and as 0.25 in the chapter) from its mean value (0.42) is associated with long-run gains in the monetization ratio of 4.15 percent on average.
  - The elasticity of monetization with respect to per-capita income is reported as 0.36: a 1 percent increase in per-capita income tends to be accompanied by a 0.36 percent increase in the monetization ratio on average.
- Pairwise correlation evidence (selected, Table 4):
  - Broad Money / GDP correlates:
    - Financial Reform: 0.1054*  
    - Inflation: -0.2509*  
    - Net Credit / GDP: 0.1947*  
    - Real Bank Deposit Rate: 0.1394*  
    - % Rural Population: -0.2625*  
    - Per Capita Real GDP: 0.2694*  
  - (* indicates significance at the 5% level.)

### Key substantive conclusions and policy implications
- Robust long-run correlates of higher monetization in low- and middle-income countries:
  - Higher real bank deposit rates (positive, significant).
  - Progress in financial sector reforms (positive, significant).
  - Higher per-capita income (positive, significant).
- Central bank financing of fiscal deficits (net credit from monetary authority to government) is associated with lower monetization in specifications where it is significant; this effect is linked to inflationary outcomes and credibility effects that reduce money’s attractiveness as a store of value and medium of exchange.
- Capital account openness is associated with higher monetization on average, reflecting role of capital inflows in expanding money quantities (though its magnitude and significance vary across specifications).
- Policy recommendations implied by empirical findings:
  - Macroeconomic stability (reducing reliance on central bank financing of fiscal deficits) supports monetization by limiting inflationary pressures and credibility losses.
  - Structural policies to advance financial sector reforms are associated with meaningful long-run increases in monetization and thus with deeper financial development.
  - Financial liberalization aimed at improving monetization should be accompanied by institutional reforms to strengthen the financial sector and reduce vulnerabilities.

### Research agenda
- Future work could examine which specific types of financial sector reforms have the largest long-run effects on monetization.

*Italic: Source — IMF working paper chapter: “5. Main Results: Multivariate Regressions” (content unit _wp12160). *

### References .............................................................................................................

### References

### Figures
- 1. Mean Monetization Ratio: Average, 1973–2005 .........................................................11
- 2. Monetization Ratio, 1970–2005 ...................................................................................12

### Table
- 1. Descriptive Statistics ....................................................................................................13
- 2. Summary Statistics and Regional Means .....................................................................14
- 3. Results of Pedroni Cointegration Tests (2004) ............................................................15
- 4. Pairwise Correlations ...................................................................................................16

*Source: _wp12160 - References — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12160.pdf*

### 5. Main Results: Multivariate Regressions ......................................................................17

### _wp12160 - 5. Main Results: Multivariate Regressions

### Introduction and research question
- Focus: long-run determinants of monetization (broad money / nominal GDP) across low- and middle-income countries.
- Key empirical question: Why do some emerging countries experience steady increases in monetization while many low-income countries experience demonetization or reversals?
- Sample: 34 low- and middle-income countries; sample period 1973−2005; unbalanced panel.

### Literature overview — factors hypothesized to affect monetization
- Macroeconomic factors:
  - Real deposit rates: higher real deposit rates are expected to increase monetization (mechanisms: discourage holding nonmonetary assets; substitution toward monetary assets).
  - Inflation and inflation expectations: higher inflation (or higher expected inflation) may reduce monetization via stronger incentives to hold real assets as inflation hedges.
  - Central bank financing of fiscal deficits: expected to depress demand for money (via higher expected inflation and credibility effects).
- Demographic/geographic factors:
  - Urbanization and rural population shares: rural population and geographic barriers can reduce financial deepening and monetization.
- Financial sector reforms and liberalization:
  - Financial liberalization, banking reforms, and institutional/legal improvements are linked to greater financial depth; capital account openness may affect monetization in either direction.
- Growth channel:
  - Monetization contributes to financial sector development, which supports growth through improved allocation of capital, monitoring, risk diversification, mobilization of savings, and reduced transaction costs.

### Empirical model and data
- Dependent variable: monetization ratio = broad money / nominal GDP (log transformed).
- Main explanatory variables:
  - log(per capita real GDP);
  - real bank deposit rate;
  - inflation expectations (alternatively current inflation, one-period-ahead inflation, or central bank credit to government);
  - % rural population;
  - capital account openness dummy;
  - financial reform index.
- Countries: selection based on data availability (particularly financial reform index).
- Descriptive notes:
  - Inter-group variation: average monetization higher in MENA and Emerging Asia (EA); Sub-Saharan Africa (SSA) lags.
  - Time-series heterogeneity: examples include steady increases (Bangladesh, China, Morocco) vs volatile patterns (Algeria, Kenya, Uganda).

### Estimation methodology
- Panel unit root tests: mixed evidence on stationarity; some series clearly nonstationary (log per capita income, monetization).
- Pedroni (2004) panel cointegration tests: group ADF and panel ADF decisively reject null of no cointegration in estimated specifications.
- Chosen estimator: Pooled Mean Group (PMG) estimator based on ARDL specification (allows heterogeneous short-run dynamics, homogeneous long-run coefficients).
- Model estimated in error-correction form; lag order chosen by Schwartz Bayes Criterion.
- Long-run coefficients constrained common across countries; short-run coefficients and error-correction speeds allowed to vary.

### Main multivariate regression findings (long-run coefficients and significance)
- From Table 5, specification 6 (final specification reported):
  - Log (Per Capita Real GDP): 0.331*** (0.088)
  - Capital Account Openness: 0.138*** (0.049)
  - Log (Net Credit / GDP): 0.021 (0.014) — not statistically significant in this specification
  - Real Bank Deposit Rate: 0.016*** (0.002)
  - Financial Reform: 0.166* (0.098)
  - Error Correction Term (φ): -0.20*** 
  - Observations: 664
  - Hausman Test Statistic: 2.98
- Earlier specifications (Table 5) consistently show:
  - Log per capita real GDP and capital account openness are positive and often highly significant across specifications.
  - Net credit from monetary authority to government (log) is negative and significant in some specifications (e.g., columns 1–3) but its negative association disappears once financial reform is included (column 6).
  - Inflation expectations show negative and significant association in some specifications (e.g., column 3 where Inflation Expectations = -0.004*** (0.001)).
  - % of Rural Population is not significant in the reported specification where it is included.

### Magnitude and economic interpretation (as reported)
- Semi-log model interpretation:
  - Coefficients on log(per capita GDP) and log(net credit/GDP) → average effect of a 1 percent change in the variable on the percentage change in monetization.
  - Coefficients on percentage variables (real deposit rate, inflation, etc.) → average association of a one percentage point deviation from the mean with monetization.
  - Financial reform index: interpret by multiplying estimated coefficient by the sample standard deviation.
- Reported magnitudes (textual statements from the chapter):
  - A 1 percentage point increase in the real deposit rate (from its mean value of -1.42 percent) is associated with a 2.2 percent increase in the monetization ratio on average.
  - An increase in the financial reform index by one standard deviation (reported both as 0.26 and as 0.25 in the chapter) from its mean value (0.42) is associated with long-run gains in the monetization ratio of 4.15 percent on average.
  - The elasticity of monetization with respect to per-capita income is reported as 0.36: a 1 percent increase in per-capita income tends to be accompanied by a 0.36 percent increase in the monetization ratio on average.
- Pairwise correlation evidence (selected, Table 4):
  - Broad Money / GDP correlates positively with Financial Reform (0.1054*), negatively with Inflation (-0.2509*), positively with Net Credit / GDP (0.1947*), positively with Real Bank Deposit Rate (0.1394*), negatively with % Rural Population (-0.2625*), positively with Per Capita Real GDP (0.2694*). (* indicates significance at the 5% level.)

### Key substantive conclusions and policy implications
- Robust long-run correlates of higher monetization in low- and middle-income countries:
  - Higher real bank deposit rates (positive, significant).
  - Progress in financial sector reforms (positive, significant).
  - Higher per-capita income (positive, significant).
- Central bank financing of fiscal deficits (net credit from monetary authority to government) is associated with lower monetization in specifications where it is significant; this effect is linked to inflationary outcomes and credibility effects that reduce money’s attractiveness as a store of value and medium of exchange.
- Capital account openness is associated with higher monetization on average, reflecting role of capital inflows in expanding money quantities (though its magnitude and significance vary across specifications).
- Policy recommendations implied by empirical findings:
  - Macroeconomic stability (reducing reliance on central bank financing of fiscal deficits) supports monetization by limiting inflationary pressures and credibility losses.
  - Structural policies to advance financial sector reforms are associated with meaningful long-run increases in monetization and thus with deeper financial development.
  - Financial liberalization aimed at improving monetization should be accompanied by institutional reforms to strengthen the financial sector and reduce vulnerabilities.
- Research agenda:
  - Future work could examine which specific types of financial sector reforms have the largest long-run effects on monetization.

*Italic: Source — IMF working paper chapter: “5. Main Results: Multivariate Regressions” (content unit _wp12160).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12160.pdf_