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The behavior of the money multiplier during and after the subprime crisis: Implications for the transmission mechanism of monetary policy

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  • Cukierman, Alex

Abstract

This short paper documents a dramatic decrease in the US conventional money multiplier since the downfall of Lehman's brothers and attributes it to the large scale quantitative easing operations of the Fed in conjunction with sluggish growth of banking credit. This, now almost ten years' old phenomenon, implies that shortage of reserves did not constitute a binding constraint on the expansion of banking credit since the start of the crisis. Since the Fed is unlikely to swiftly reduce its bloated balance sheet the banking system will continue to possess substantial excess reserves implying that they will not constitute a constraint on credit expansion for quite a while. Hence the conventional money multiplier is likely to be of little use as a predictor of the transmission of monetary base expansions to banking credit and the money supply in the foreseeable future.

Suggested Citation

  • Cukierman, Alex, 2017. "The behavior of the money multiplier during and after the subprime crisis: Implications for the transmission mechanism of monetary policy," CEPR Discussion Papers 12490, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12490
    as

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    References listed on IDEAS

    as
    1. Cukierman, Alex & Izhakian, Yehuda, 2015. "Bailout uncertainty in a microfounded general equilibrium model of the financial system," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 160-179.
    2. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
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    More about this item

    Keywords

    banking credit and reserves.; monetary base; Money multiplier since the crisis and in the future; Quantitative easing;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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