The behavior of the money multiplier during and after the subprime crisis: Implications for the transmission mechanism of monet

Alex Cukierman

No 12490, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This short paper documents a dramatic decrease in the US conventional money multiplier since the downfall of Lehman’s brothers and attributes it to the large scale quantitative easing operations of the Fed in conjunction with sluggish growth of banking credit. This, now almost ten years’ old phenomenon, implies that shortage of reserves did not constitute a binding constraint on the expansion of banking credit since the start of the crisis. Since the Fed is unlikely to swiftly reduce its bloated balance sheet the banking system will continue to possess substantial excess reserves implying that they will not constitute a constraint on credit expansion for quite a while. Hence the conventional money multiplier is likely to be of little use as a predictor of the transmission of monetary base expansions to banking credit and the money supply in the foreseeable future.

Keywords: Money multiplier since the crisis and in the future; Quantitative easing; Monetary base; Banking credit and reserves (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pke
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