Teaching macroeconomics: The money multiplier

It is a staple of every macroeconomics textbook.  Essential to any understanding of the money supply in a modern economy (that the banking system creates money).

Here is an excellent blog post on the Indian money multiplier.  Notice that India Reserve Bank uses the reserve requirement (called the cash reserve requirement) as a policy tool, and lowered the ratio in 2008, so the money multiplier rose sharply.

A nice post from Financial Times on the money multiplier. As most textbooks point out, while the money multiplier is a good theory, and very insightful about the process of money supply creation, in practice the excess reserves and currency-deposit ratio are endogenous, and so Central Banks generally no longer target the monetary base and money supply, and instead target short term (and sometimes long term) interest rates.

A nice article on monetary policy and the money multiplier in the euro zone.

One last short note on the money multiplier in the United States.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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