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Decomposing US Money Supply Changes since the Financial Crisis
School of Business, E336 Thompson Hall, SUNY at Fredonia, Fredonia, NY, 14067, USA
* Author to whom correspondence should be addressed.
Received: 7 May 2013; in revised form: 18 June 2013 / Accepted: 19 June 2013 / Published: 21 June 2013
Abstract: In response to the financial crisis of 2008, the Federal Reserve radically increased the monetary base. Banks responded by increasing excess reserves rather than increasing bank loans, and the public responded with a substantial flight to liquidity in the form of currency and demand deposits. As a result, the money-supply multipliers substantially decreased, so that the actual money supply measures grew more moderately than the base. The sustained multiplier-collapse spawned reexamination of monetary versus fiscal theories of price-level determination. This paper, however, presents decompositions of the money-multiplier collapse into changes in the currency-to-deposit ratios, and changes in the reserve-to-deposit ratio. By doing so, possible near-term increases in the multipliers are simulated so that the possibility of either full or partial restoration to their pre-crisis levels is assessed. Policy possibilities for controlling the money supply over various horizons follow. This analysis illustrates the Federal Reserve’s exit dilemma that results from its financial-crisis policy.
Keywords: money supply; money multiplier; monetary policy
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Robinson, R.; El Nasser, M. Decomposing US Money Supply Changes since the Financial Crisis. Int. J. Financial Stud. 2013, 1, 32-44.
Robinson R, El Nasser M. Decomposing US Money Supply Changes since the Financial Crisis. International Journal of Financial Studies. 2013; 1(2):32-44.
Robinson, Richard; El Nasser, Marwan. 2013. "Decomposing US Money Supply Changes since the Financial Crisis." Int. J. Financial Stud. 1, no. 2: 32-44.