Money Creation and Banking: Theory and Evidence

Heon Lee

Papers from arXiv.org

Abstract: This paper develops a monetary-search model where the money multiplier is endogenously determined. I show that when the central bank pays interest on reserves, the money multiplier and the quantity of the reserve can depend on the nominal interest rate and the interest on reserves. The calibrated model can explain the evolution of the money multiplier and the excess reserve-deposit ratio in the pre-2008 and post-2008 periods. The quantitative analysis suggests that the dramatic changes in the money multiplier after 2008 are driven by the introduction of the interest on reserves with a low nominal interest rate.

Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2109.15096

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