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Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination

Author

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  • Raymond E. Lombra

    (Penn State University)

Abstract

Ignoring various institutional and structural "details" has devastating implications for a large body of received theoretical and empirical work on the multiplier model, and the positive and normative economics which motivates and flows from it. The major elements of the critique include: the multiplier model is not structural, but rather is a reduced-form; reserves in practice have been endogenously determined; and the predictive accuracy of multiplier models is considerably overstated. So why does the model survive? Attractive pedagogical features, the poor performance of models with more structure, the tendency for recent expositors of the multiplier model to concede many of the points raised by the critique, and the difficulties associated with falsifying such models are emphasized.

Suggested Citation

  • Raymond E. Lombra, 1992. "Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination," Eastern Economic Journal, Eastern Economic Association, vol. 18(3), pages 305-314, Summer.
  • Handle: RePEc:eej:eeconj:v:18:y:1992:i:3:p:305-314
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume18/V18N3P305_314.pdf
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    References listed on IDEAS

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    1. McCloskey, Donald N, 1983. "The Rhetoric of Economics," Journal of Economic Literature, American Economic Association, vol. 21(2), pages 481-517, June.
    2. Friedman, Benjamin M., 1977. "Empirical issues in monetary policy : A review of monetary aggregates and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(1), pages 87-101, January.
    3. Marvin Goodfriend, 1982. "A model of money stock determination with loan demand and a banking system balance sheet constraint," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 3-16.
    4. R. Alton Gilbert, 1985. "Operating procedures for conducting monetary policy," Review, Federal Reserve Bank of St. Louis, issue Feb.
    5. Mascaro, Angelo & Meltzer, Allan H., 1983. "Long- and short-term interest rates in a risky world," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 485-518, November.
    6. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers 159, Cowles Foundation for Research in Economics, Yale University.
    7. Lyle E. Gramley & Samuel B. Chase, 1965. "Time deposits in monetary analysis," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 1380-1406.
    8. Lombra, Raymond & Struble, Frederick, 1979. "Monetary Aggregate Targets and the Volatility of Interest Rates: A Taxonomic Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 284-300, August.
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    Cited by:

    1. Jakab, Zoltan & Kumhof, Michael, 2015. "Banks are not intermediaries of loanable funds – and why this matters," Bank of England working papers 529, Bank of England.
    2. Clavero, Borja, 2017. "A contribution to the Quantity Theory of Disaggregated Credit," MPRA Paper 76657, University Library of Munich, Germany.

    More about this item

    Keywords

    Money Stock; Money; Multiplier;

    JEL classification:

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

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