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An alternative framework for a textbook analysis of the money multiplier

Author

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  • Jesse Aaron Zinn

    (Clayton State University)

Abstract

In textbooks on the theory of money it is standard practice to hold both reserves and deposits fixed to study the relationship between the quantity of currency in the economy and the money multiplier. But doing so leads to a result that is contrary to the notion that if the public withdraws from their deposits in order to increase currency holdings then bank lending will decrease, causing a fall in both the money supply and the money multiplier. Specifically, when reserves are greater than deposits and both are fixed the money multiplier has a positive relationship with both currency holdings and the currency-deposit ratio. I show that these results are artifacts of implicitly assuming that the monetary authority behaves so as to keep deposits and reserves constant in response to a change in currency held by the public. Dropping these assumptions and abstracting from any response from the central bank results in an unconditionally non-positive relationship between currency holdings and the money multiplier.

Suggested Citation

  • Jesse Aaron Zinn, 2018. "An alternative framework for a textbook analysis of the money multiplier," Economics Bulletin, AccessEcon, vol. 38(4), pages 2111-2115.
    • Handle: RePEc:ebl:ecbull:eb-18-00450
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    File URL: http://www.accessecon.com/Pubs/EB/2018/Volume38/EB-18-V38-I4-P194.pdf
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    References listed on IDEAS

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    1. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    2. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages 271-288, November.
    3. Zinn, Jesse Aaron, 2017. "Our Textbooks are Wrong: How An Increase in the Currency-Deposit Ratio Can Increase the Money Multiplier," OSF Preprints 2dbj6, Center for Open Science.
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    Cited by:

    1. Zinn, Jesse Aaron, 2022. "The Money Multiplier and Other Measures of Financial Sector Performance," SocArXiv zusqa, Center for Open Science.

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    More about this item

    Keywords

    Money Supply; Monetary Base; Money Multiplier; Deposits; Bank Reserves;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics

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