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Money, reserves, and the transmission of monetary policy: Does the money multiplier exist?

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  • Carpenter, Seth
  • Demiralp, Selva

Abstract

With the use of non-traditional policy tools, the level of reserve balances has risen in the US from roughly $20 billion before the financial crisis to well past $1 trillion. The effect of reserve balances in macroeconomic models often comes through the money multiplier, affecting the money supply and the bank lending. In this paper, we document that the mechanism does not work through the standard multiplier model or the bank lending channel. 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.

Suggested Citation

  • Carpenter, Seth & Demiralp, Selva, 2012. "Money, reserves, and the transmission of monetary policy: Does the money multiplier exist?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 59-75.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:59-75
    DOI: 10.1016/j.jmacro.2011.09.009
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    More about this item

    Keywords

    Monetary transmission mechanism; Money multiplier; Lending channel;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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