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Pacific Islands: Money Multiplier Effect in Papua New Guinea

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A new study has shed light on the effectiveness of monetary policy transmission in Pacific Island countries, with a focus on Papua New Guinea (PNG). The research paper, titled “Does money multiplier hold in Pacific Island countries? The case of Papua New Guinea,” was published as a joint policy research working paper.

Financial Inclusion Indicators

The study analyzed the determinants of financial inclusion indicators, such as:

  • Formal account ownership
  • General savings
  • Formal credit access

The results show that various demographic factors, including:

  • Age
  • Education level
  • Income
  • Marital status
  • Region

have a significant impact on these indicators.

Money Multiplier Effect in PNG

Interestingly, the analysis revealed that the money multiplier effect, which is a key concept in monetary economics, does not hold in PNG. This means that changes in the money supply do not necessarily lead to proportional changes in the overall spending in the economy.

Regional Differences in Financial Inclusion

The study also found significant regional differences in financial inclusion. For instance:

  • Individuals from Torba Province were more likely to have formal accounts and access credit compared to those from Malampa Province.
  • Residents of Port Vila had higher savings rates than those from other regions.

Regional Breakdown

According to the study, individuals from Malampa Province were less likely to have formal accounts, general savings, and access credit compared to those from other provinces. In contrast, Torba Province showed higher levels of financial inclusion. Here is a summary of the regional breakdown:

  • Malampa: -0.764*** (formal account), -0.438** (general saving), -0.240 (formal credit)
  • Penama: 0.217 (formal account), 0.059 (general saving), 0.258 (formal credit)
  • Port Vila: 0.174 (-0.316**, general saving), 0.734*** (formal credit)
  • Sanma: 0.071 (formal account), 0.107 (general saving), -0.203 (formal credit)
  • Shefa: 0.021 (-0.054, general saving), 0.457** (formal credit)
  • Tafea: 0.073 (formal account), -0.211 (general saving), 0.022 (formal credit)
  • Torba: 0.684** (formal account), -0.115 (general saving), 1.230*** (formal credit)

Note: *** indicates statistical significance at the 1% level, ** indicates statistical significance at the 5% level.

Implications for Monetary Policy

The study’s findings have important implications for monetary policy in PNG and other Pacific Island countries, highlighting the need to consider regional differences when designing policies to promote financial inclusion.