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Int. J. Financial Stud., Volume 1, Issue 2 (June 2013), Pages 32-44

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Research

Open AccessArticle Decomposing US Money Supply Changes since the Financial Crisis
Int. J. Financial Stud. 2013, 1(2), 32-44; doi:10.3390/ijfs1020032
Received: 7 May 2013 / Revised: 18 June 2013 / Accepted: 19 June 2013 / Published: 21 June 2013
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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 [...] Read more.
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. Full article
(This article belongs to the Special Issue Recent Developments in Finance and Banking after the 2008 Crisis)

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