Liquidity Risk, Credit Risk and the Money Multiplier

Tatiana Damjanovic (), Vladislav Damjanovic and Charles Nolan

Working Papers from Business School - Economics, University of Glasgow

Abstract: Before the financial crisis there was a significant, negative relationship between the money multiplier and the risk free rate; post-crisis it was significant and positive. We develop a model where banksíreserves mitigate not only liquidity risk, but also default/credit risk. When default risk dominates, the model predicts a positive relationship between the risk free rate and the money multiplier. When liquidity risk dominates, that relationship is negative. We suggest reduced liquidity risk, from QE and remunerated reserves, helps explain the multiplier data. The model's implications linking the stock market and the money multiplier are also deduced and verified.

Keywords: quidity risk; credit risk; excess reserves; US money multiplier, remuneration of reserves (search for similar items in EconPapers)
JEL-codes: E40 E44 E50 E51 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2017_09

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