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Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination

  • Raymond E. Lombra

    (Penn State University)

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    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.

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    Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

    Volume (Year): 18 (1992)
    Issue (Month): 3 (Summer)
    Pages: 305-314

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    Handle: RePEc:eej:eeconj:v:18:y:1992:i:3:p:305-314
    Contact details of provider: Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
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    1. 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.
    2. R. Alton Gilbert, 1985. "Operating procedures for conducting monetary policy," Review, Federal Reserve Bank of St. Louis, issue Feb.
    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. 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.
    5. 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.
    6. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers 159, Cowles Foundation for Research in Economics, Yale University.
    7. McCloskey, Donald N, 1983. "The Rhetoric of Economics," Journal of Economic Literature, American Economic Association, vol. 21(2), pages 481-517, June.
    8. 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.
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