Tuesday, August 18, 2020

Primer: Understanding The Money Multiplier Model — Brian Romanchuk

The standard MMT position is that the money multiplier is wrong (doesn't exist in the real world of banking). MMT explains this is in terms of the erroneous loanable funds assumption.

Brian looks at the assumptions of the model, on which the model is built. There are still quite a few people that believe in the money multiplier and it appear to be still prevalent in texts books. So it is worthwhile knowing the background, which Brian's post summarizes.

Bond Economics
Primer: Understanding The Money Multiplier Model
Brian Romanchuk


Matt Franko said...

"We ignore the existence of bank capital and liquidity regulations. "

So does MMT for the most part....

Footsoldier said...

The correction is coming in the next few weeks only question is how big it will be.


NeilW said...

The money multiplier is an ex-post calculation that will calculate precisely how much the money supply goes up based on the other parameters. There's a paper somewhere that shows it comes up with the same number as the "loans creates deposits" approach.

The mistake is thinking the variables in the calculations have any ex-ante control function - rather than just being a mathematical shorthand.

Matt Franko said...

Right Neil .... keen should get some training in Accounting.... then I think he’d see what he was doing...

Matt Franko said...


“However, this season, something is different. The Fed started to tighten up Quantitative Easing (implementing Quantitative Tightening, in a sense). Fiscal outlays will be lower, and money supply also declines.“

Fed has not stopped increasing reserves they have maintained purchases of securities and now are starting to lend directly to transportation authorities... fiscal out lays are at all time highs and are not even decelerating the 2nd derivative is still higher and maybe we get some additional fiscal for Covid..l

Plus nobody is bullish... and I don’t see any emergent policy that is going to depress bank leverage ratio... (maybe some additional PPPloans in a new fiscal phase but we are still far away from that possibility...)

Tom Hickey said...

@ Neil W

This appears to be the reason that Paul Krugman still argues for the MM. Although he admits that the original loanable funds theory was wrong, he thinks it is still applicable under "loans create deposits," apparently because the numbers are the same. Like many other economists with respect to accounting identities, they get the direction of causality wrong. Many still think that savings serve to create (are needed for financing) investment in spite of Keynes showing the causality runs in the other direction. The Fed seems to be still operating under such assumptions.