Talk:Money multiplier

Refactor

I’ve refactored this page from the money creation page, as it is an important and slightly subtle idea, and the information was duplicated on several pages.

—Nils von Barth (nbarth) (talk) 08:10, 21 December 2009 (UTC)

Maximum Reserve Ratio (also in example) is not Original research

from money creation: "As a formula, if the reserve ratio is R, then the money multiplier m is the reciprocal, m = 1 / R, and is the maximum amount of money commercial banks can legally create for a given quantity of reserves."

The maximum reserve ratio in the example would be 25% based on 20/80. 20 being the reserves and 80 being the money created given the reserves. This is inclusive of 20%, or the reserve rate. This also means that the model is just as valid for a reserve ratio of 25% as it is for 20% as it is for 0.0001%. So for the last time, stop edit warring calling this original research. Javalizard (talk) 19:37, 3 January 2011 (UTC)

Errata

Definition section: Money multiplier is defined in two ways: One, as a statistical measure of commercial bank money vs central bank money, and Two, as a hypothetical maximum for money deposited in a fractional resreve banking system. Fine as it goes.

Under Mechanism, we have a confusion of terminology. The entire section is a mish-mash of terms for things that occur at the central bank level and at the local or commercial bank level.Central bank reserves are loans provided to local banks to cover demand for excessive or unexpected withdrawals. These are not deposits and are not loaned out. The "reserve" in fractional-reserve banking is the portion of deposits that must be retained by the local bank as a contingency against losses and to guard against unexpected withdrawals.

Reserves-first model section: The Reserves-first model doesn't sound like that described for fractional-reserve banking. In fractional-reserve banking, reserves are not lent out. A portion of deposits, defined by RR, is retained by the commercial bank as local reserves. The remainder, defined by 1-RR, is lent out and forms the basis for the "money creation" process.

Terms like "Money Stock", "Monetary Base", and "Publicly-held Currency" only have meaning at the central Bank level. They would not be used at the commercial bank level.

In the derivation, the sentence, "Let the monetary base be normalized to unity." is meaningless and should be deleted. The parameters "Deposits", "PubliclyHeldCurrency", and "Loans" are dimensionless values relative to the initial deposit in the relending sequence. The terms on the right in each are the results of an infinite number of steps in a geometric series. It can be shown that the total reserves plus total currency drain will always equal the initial deposit in the relending process.

The first two terms in the theoretical money multiplier equation are statistical in nature and rightly belong with the derivation at the bottom of the section. The section at the bottom should be labeled "Statistical money multiplier" consistent with the description under "Definition" above.

The Loans-first model is likewise not consistent with the description of fractional-reserve banking. Virgil H. Soule (talk) 16:44, 18 May 2013 (UTC)

That all sounds reasonable. Since you have taken the trouble to identify the problems in the writing in that section, and are probably more familiar with them then anyone else here, could you do a rewrite of the section as you suggested? LK (talk) 03:01, 26 November 2015 (UTC)

Alternative perspectives

I've moved some material about alternative interpretations from the summary to a section lower down. While I don't want to pass comment on the economics, these two paragraphs (offering a fairly fundamental criticism of the concept of the multiplier and the argument laid out the rest of the section) made the section confusing for the lay reader. Given that the average visitor is going to be approaching this article for a description of the conventional approach, I thought that the situation would be clearer if the criticism was put in its correct context.

Someone with a better knowledge of the literature might want to review what the section actually says - the original author quoted the text verbatim from the article referenced at the end of the section, so it isn't an overview of the field (or intended to be). I've rounded off a few of the edges to put it in a slightly more encyclopaedia-like format. 31.54.105.33 (talk) 14:07, 15 February 2014 (UTC)

Bank of England Demystifies the Money Multiplier

In their 2014Q1 Quarterly Bulletin, The Bank of England demystifies the "money multiplier" myth of fractional reserve banking. They state, "Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. "

Are there any objections to including this clarification about the "money multiplier"?WouNur (talk) 16:54, 21 November 2015 (UTC)

I agree that this should be added to the article — Preceding unsigned comment added by 86.167.170.92 (talk) 12:55, 12 November 2017 (UTC)

Misleading edit removed

This material was added to the article:

In 2010, a paper by the US Federal Reserve concludes that "the [transmission] mechanism does not work through the standard multiplier model or the bank lending channel. In particular, if the level of reserve balances is expected to have an impact on the economy, it seems unlikely that a standard multiplier story will explain the effect." [1]

I removed it. According to the source, this was not a "conclusion" by the "Federal Reserve". This was a preliminary staff working paper by two individuals named Seth B. Carpenter and Selva Demiralp. Here is a direct quote from the title page of the source:

Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.

---from Seth B. Carpenter & Selva Demiralp, No. 2010-41, "Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?", Finance and Economics Discussion Series/Divisions of Research & Statistics and Monetary Affairs/Federal Reserve Board, Washington, D.C. (bolding added).

So, no the paper does not purport to include any "conclusion" by the "Federal Reserve." Famspear (talk) 19:06, 10 May 2016 (UTC)

Dr. McAndrews's comment on this article

Dr. McAndrews has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Second sentence: "Most often, it measures the maximum amount of commercial bank money that can be created by a given unity of central bank money, assuming that the bank is subject to reserve requirements and that the reserve requirement is the sole binding constraint on the bank's ability to make loans."

The sentence in the second paragraph: "Even in those countries that do (such as the USA), the reserve requirement is a ratio to depsoits held, not a ratio to loans that can be extended." is misleading and should be deleted. The following sentence: "Under the Basel III..." is also misleading as the capital requirement itself may not be the binding constraint on bank lending. It too should be reworded or deleted.

The first sentence of the third paragraph should delete the parenthetical "(loans)".

The first sentence of the fourth paragraph should be changed to "If banks lend out close to the maximum allowed by their reserve requirements...."

In the "Reserves First" section, it should be clearly stated that the model assumes that 1. Loans are in excess demand, and 2. the reserve requirement is the binding constraint on loan supply.

I would drop a lot of the excess detail of the tables, etc., as it makes it look scientific somehow.

In the "Implications for monetary policy section," I would drop the clause that says "The multiplier plays a key role in monetary policy" as I don't believe that it does.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. McAndrews has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Antoine Martin & James McAndrews & David Skeie, 2011. "A note on bank lending in times of large bank reserves," Staff Reports 497, Federal Reserve Bank of New York.

ExpertIdeasBot (talk) 15:53, 19 May 2016 (UTC)

Dr. Benchimol's comment on this article

Dr. Benchimol has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

General comment: good article but presentation of references need deep revision. The form (links only for instance) is not adapted. Reviewers of the article should cite published articles instead of working or discussion papers.

Some relevant references: Money, reserves, and the transmission of monetary policy: Does the money multiplier exist?, Journal of Macroeconomics, Volume 34, Issue 1, March 2012, Pages 59-75 Seth Carpenter, Selva Demiralp

A HISTORY OF THE FEDERAL RESERVE, Macroeconomic Dynamics / Volume 9 / Issue 02 / April 2005, pp 267-275

AN INTERVIEW WITH MILTON FRIEDMAN, Macroeconomic Dynamics / Volume 5 / Issue 01 / February 2001, pp 101-131

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Benchimol has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Benchimol, Jonathan & Fourcans, Andre, 2017. Money and monetary policy in the Eurozone: an empirical analysis during crises. Forthcoming in Macroeconomic Dynamics.

ExpertIdeasBot (talk) 16:18, 19 May 2016 (UTC)

Dr. Damjanovic's comment on this article

Dr. Damjanovic has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The definition is incorrect and unclear. "commercial bank money" is something which no one understand what it is.

"Bank capital" is not "the maximum amount that bank can lend"

The formal definition is wrong, it should be reserves to deposit ratio, not required reserves ratio. All examples are not well explained and therefore do not contribute to better understanding.

However, the last section "Implication for monetary policy" is fine. Here the following citation can be added ��� GOODHART, C. A. E., 2009, The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts, Economica.

DOI: 10.1111/j.1468-0335.2009.00790.x

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Damjanovic has published scholarly research which seems to be relevant to this Wikipedia article:

• Reference : Tatiana Damjanovic & Sarunas Girdenas, 2013. "Should Central Bank respond to the Changes in the Loan to Collateral Value Ratio and in the House Prices?," Discussion Papers 1303, Exeter University, Department of Economics.

ExpertIdeasBot (talk) 21:43, 30 May 2016 (UTC)

Dr. Pozzolo's comment on this article

Dr. Pozzolo has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

1. The following paragraph if criticisms largely overstates their relevance: the concept of the money multiplier is widely accepted in the discipline, with some caveats and specificities in its functioning, but not such a bold criticism as it appears here. The reference to Bank of England should be to the actual papers (I guess they are a couple of papers by McLeay et al. in the Quarterly Bulletin, 2014). I do not know anything about S&P's contribution, but I am a bit skepticla on its scientific content. Although the money multiplier concept is a traditional portrayal of fractional reserve banking it has been criticized as being misleading. The Bank of England and the Standard & Poor's rating agency (amongst others) have issued detailed refutations of the concept together with factual descriptions of banking operations.[3][4] Several countries (such as Canada, the UK, Australia and Sweden) set no legal reserve requirements.[5] Even in those countries that do (such as the USA), the reserve requirement is as a ratio to deposits held, not a ratio to loans that can be extended.[5] Under the Basel III global regulatory standard, it is the level of bank capital that determines the maximum amount that banks can lend.[6] Basel III does stipulate a liquidity requirement to cover 30 days net cash outflow expected under a modeled stressed scenario (note this is not a ratio to loans that can be extended) however liquidity coverage does not need to be held as reserves but rather as any high-quality liquid assets [7][8]

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Pozzolo has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Caiazza, Stefano & Pozzolo, Alberto Franco, 2014. "The determinants of abandoned M&As in the banking sector," Economics & Statistics Discussion Papers esdp14074, University of Molise, Dept. EGSeI.

ExpertIdeasBot (talk) 20:21, 24 September 2016 (UTC)

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Problems in article

I think that the current article has various problems and stands in need of a rehaul. The lead does not give a good overview of the concept and issues surrounding it, being too full of details, several of them quite technical, which should rather be placed in the main text, if mentioned at all. Secondly, several statements are unsourced. This seems to include large parts of the section "Definition", where some of the seeming references are more like comments to the text. Parts of the section have a hint of original research. Thirdly, the text has a somewhat simplified, or perhaps obsolete, view of "mainstream" economics, presenting a picture that the endogeneity of money is purely a Post-Keynesian, hence anti-mainstream position. I do not think that is a correct view of the matter today, the endogeneity of money being accepted generally in central bank circles and in several prominent mainstream research and teaching texts as well. Økonom (talk) 11:17, 18 October 2023 (UTC)

Following up on this post, I have inserted my proposed changes in the article. I have renewed the main references, using in particular recent versions of prominent textbooks by Gregory Mankiw, Olivier Blanchard and David Romer, the articles in The New Palgrave on money supply and monetary base, and several recent central bank explanations of current money creation and monetary policy. I have tried to simplify the explanation of the formal derivation of the money multiplier, deleted some unsourced text and rearranged the sections, introducing a separate section on monetary policy in practice, historically and currently. I am not certain that the section giving an algebraic and a numerical example of the supposed monetary creation process is very useful to the reader, but I have kept it, only moving it towards the end of the article. Finally, I have downplayed the criticism of "mainstream economics" that was present in the former version, but which I do not consider warranted in the light of the sources pointed to in the new version. Økonom (talk) 15:05, 25 October 2023 (UTC)