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Clearing vs. Leakage: Does Note monopoly Increase Money and Credit Cycles?


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  • Hortlund, Per

    (Dept. of Economics, Stockholm School of Economics)

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    The effects of note monopolisation on the amplitude of money and credit cycles are studied. Swedish bank data for 1871–1915 reveal that money cycles became smaller, but credit cycles larger, after the Bank of Sweden gained a note monopoly in 1904. At the same time, the money multiplier decreased, while the credit multiplier increased. If the central bank's reserve ratio is larger than that of the commercial banks, and if the currency-deposit ratio is sufficiently large, the leakage effect could dominate the loss-of-clearing effect (base expansion), such that the money multiplier decreases. That the credit multiplier simultaneously increased is attributed mainly to an increasing time-demand deposit ratio, which increased the credit capacity of the banking system.

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    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 600.

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    Length: 34 pages
    Date of creation: 15 Jun 2005
    Date of revision:
    Handle: RePEc:hhs:hastef:0600

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    Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
    Phone: +46-(0)8-736 90 00
    Fax: +46-(0)8-31 01 57
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    Keywords: Clearing mechanism; Credit expansion; Currency-deposit ratio; Fiduciary money; Free banking; Leakage; Money multiplier;

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    1. Selgin, George, 1994. "Free Banking and Monetary Control," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(427), pages 1449-59, November.
    2. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, American Economic Association, vol. 76(1), pages 125-40, March.
    3. Selgin, George, 2001. "In-Concert Overexpansion and the Precautionary Demand for Bank Reserves," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(2), pages 294-300, May.
    4. Hortlund, Per, 2005. "Is the Law of Reflux Valid?," Working Paper Series in Economics and Finance, Stockholm School of Economics 599, Stockholm School of Economics.
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