Working Paper: CEPR ID: DP12490
Authors: Alex Cukierman
Abstract: This short paper documents a dramatic decrease in the US conventional money multiplier since the downfall of Lehman’s brothers and attributes it to the large scale quantitative easing operations of the Fed in conjunction with sluggish growth of banking credit. This, now almost ten years’ old phenomenon, implies that shortage of reserves did not constitute a binding constraint on the expansion of banking credit since the start of the crisis. Since the Fed is unlikely to swiftly reduce its bloated balance sheet the banking system will continue to possess substantial excess reserves implying that they will not constitute a constraint on credit expansion for quite a while. Hence the conventional money multiplier is likely to be of little use as a predictor of the transmission of monetary base expansions to banking credit and the money supply in the foreseeable future.
Keywords: money multiplier; quantitative easing; monetary base; banking credit; reserves
JEL Codes: E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quantitative easing (QE) (C54) | excess reserves (E51) |
| excess reserves (E51) | banking credit (G21) |
| quantitative easing (QE) (C54) | money multiplier (E51) |
| money multiplier (E51) | banking credit (G21) |
| capital requirements (G32) | banking credit (G21) |
| risk preferences (D81) | banking credit (G21) |