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Monetary and financial innovations and stability of money multiplier in Rwanda

Thomas Kigabo Rusuhuzwa

Director General, Monetary Policy and Research Directorate, National Bank of Rwanda.

Author’s Email: tkigabo(at)
Tel.: +250788303633

Article Number:  |   Pages:  |     |   DOI:

 Received:  Accepted: December 27, 2014  Published:


The objective of this paper was to assess the stability of money multiplier, one of the key pillars of the current monetary policy framework in Rwanda.  As most of recent empirical studies on money multiplier, we have used Engle Granger cointegration techniques to test the existence of long run relation between the broad money (m) and reserve money (b) in Rwanda.  However, these tests have   low power to reject the hypothesis of no cointegration for short sample and/or when a structural break is ignored. In addition, assuming a time invariant structural relationship between the two variables may not be realistic given that important developments have happened in the Rwandan banking sector. In addition to the Engle Granger cointegration test, we have tested the time invariance of the cointegrating vector using Gregory – Hansen cointegration test and Hansen (1992) test. The paper concludes that, the long run relationship between m and b holds over some period of time, and then has shifted to a new long-run relationship after 2010 as a result of changes in monetary policy framework and financial sector development. In terms of policy implications, the result indicates that the money multiplier in Rwanda is stable over long time horizon with reasonable degree of accuracy even when there is shift in money multiplier relation. However, the structural change in the relationship between the two variables may reduce the prediction capacity of the money multiplier model and limit the controllability of money supply using reserve money as operating variable.

money multiplier, cointegration, structural breaks

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