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Risk Management and the Money Multiplier

Tatiana Damjanovic (), Vladislav Damjanovic () and Charles Nolan ()

No 2016_03, CEGAP Working Papers from Durham University Business School

Abstract: The conventional model of bank liquidity risk management predicts a negative relation between the risk free rate and the money multiplier. We extend that model to reflect credit, or loan book, risk. We find that credit risk model predicts a positive correlation between the risk free rate and the money multiplier, other things constant. In the pre-financial crisis period the liquidity risk view fits the data better whilst in the post-crisis period, the credit risk management model is more appropriate in explaining the relationship between the money multiplier and the risk free rate. In addition, the model implies that the money multiplier should increase with stock market return and decline with its volatility. We provide evidence that this is indeed the case

Keywords: Credit risk management; Excess reserves; Money multiplier. (search for similar items in EconPapers)
JEL-codes: E40 E44 E50 E51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon, nep-rmg and nep-sog
Date: 2016-06
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