Money Multiplier Model

Evidence and data

Use monetary base, reserves, broad money, currency-deposit ratios, reserve-deposit ratios, bank capital, loan demand, and excess-reserve behavior.

Calibration or measurement

The multiplier is scenario-specific. Currency preference, reserve preference, reserve remuneration, and capital rules determine whether reserves pass into broad money.

Boundaries

• Abundant-reserve floor systems weaken the old reserve-to-loan chain.
• Bank capital and loan demand can bind before reserves do.
• A stable multiplier is an assumption, not an empirical law.

Use guidance

When sufficient

The classroom intuition for why reserve requirements place a bound on deposit creation in a reserve-scarce regime. If a central bank holds reserves below the banking system's desired level and does not pay interest on reserves, the ratio mechanics describe how a unit of base money can support a multiple of deposits. In historically reserve-scarce regimes, the multiplier approximation is informative about the upper bound on deposit expansion.

When sketch only

Do not use to predict the money stock under any modern central-bank operating framework. In an ample-reserves floor system, banks hold excess reserves voluntarily, and the constraint on lending is capital, loan demand, and creditworthiness, not reserves. McLeay, Radia, and Thomas (2014) showed that commercial banks create money by making loans, with reserves adjusting afterward, not before.

When to switch

Switch to an endogenous-money framework for any prediction about credit and money creation in a modern economy. The operational description in McLeay-Radia-Thomas 2014 is the right starting point. Switch to a bank capital or credit-supply model (Bernanke-Gertler 1989) when balance-sheet constraints on bank lending are the binding friction.

Falsification signal

The 2008-2015 QE programs in the US, UK, EU, and Japan each produced large permanent expansions of central-bank reserves with no proportional expansion of broad money or bank lending. A chart showing the monetary base and M2 or M3 diverging sharply after the reserve expansion falsifies the mechanical multiplier prediction for those episodes.