Money creation multiplier

The money multiplier is a monetary theory multiplier , of the interaction of central bank , commercial banks and non-banks ( households , enterprises and households and companies ) in the development of the money supply explains. The model assumes a multiplication of money by the commercial banks on the basis of the monetary base issued by the central bank (central bank money) - hence the term multiplier . This widespread notion is rejected as false and misleading by central banks. a. from the Deutsche Bundesbank and the Bank of England , but can still be found in many textbooks.

Model construction

The starting point for the consideration is the monetary base issued by the central bank , which the central bank makes available to the commercial banks for a fee (see also main refinancing instrument ). The size and price of these money quotas are the subject of the central bank's monetary policy . The commercial banks, in turn, make central bank money available to households and companies in the form of loans.

A multiplier effect now occurs because households and companies do not need at least part of their money in the form of cash and leave this part as book money within the commercial banking system. These deposits are in turn available as a basis for further lending.

The multiplier effect is weakened by the minimum reserve requirement , according to which commercial banks are not allowed to pass on their customers' deposits in full as loans.

The following relationship arises between the money supply , which results from the multiplier effect, and central bank money : ${\displaystyle M1}$ ${\displaystyle M0}$

${\displaystyle M1=M0\cdot \underbrace {\left({\frac {1+BH}{RS+BH}}\right)} _{\text{Multiplikator}}}$

${\displaystyle RS}$be the reserve rate of the banks (i.e. the proportion of deposits that are voluntarily or involuntarily not granted as a loan) and the cash holdings of households and companies (i.e. the proportion of cash in their book money holdings). For the derivation of the formula, the money supply as expressed, with the book money stock (current account) of households and companies and their cash holdings are, and the central bank as the sum of reserve and cash equivalents: . It follows from this . ${\displaystyle BH}$ ${\displaystyle M1=G+B=G\cdot (1+BH)}$ ${\displaystyle G}$ ${\displaystyle B}$ ${\displaystyle M0=G\cdot RS+B=G\cdot (RS+BH)}$ ${\displaystyle {\frac {M1}{M0}}={\frac {1+BH}{RS+BH}}}$

criticism

In practice, the money creation multiplier has at most a theoretical approximation and above all represents a correlation in normal times, which, however, collapses at the zero interest limit or in a liquidity trap . Since central bank money (except for cash) does not get into the real economy money cycle, because companies and private households do not have access to accounts at the central bank and thus access to central bank money, accordingly, if central bank money is expanded, e.g. B. in the context of quantitative easing (QE), by no means can we speak of a “glut of money” with a direct inflationary effect. Such a formulation, as it is often found in the media, ignores the fundamental differences between central bank money and deposit money or assumes a stable causal relationship - which does not exist in reality - between the two variables on the basis of a money creation multiplier model.

A major factor that is neglected is the level of demand from non-banks (companies, consumers, states) for credit, which is also dependent on the economy. Claus Köhler uses the example of the 1975 recession as an example.

The classic money creation multiplier is based on a popular misunderstanding, according to which the banks would lend their customers' deposited savings minus the minimum reserve and act as intermediaries between savers and borrowers. The classic multiplier model was based on the need to raise savings. That is only partially correct, namely from a microeconomic point of view and only for the individual bank. In fact, the causal relationship can be seen the other way around when viewed from a macroeconomic perspective: In the overall banking system, the sum of the deposits arises from the net lending of the commercial banks and only if the liabilities (deposits) of an individual bank A come into play, this reduces its liquidity, increases its liquidity (if increased cash hoarding is neglected ) but at the same time the liquidity of complementary bank B, which means that it has an increased excess reserve and increased lending options. For further lending, bank A may now need refinancing credit either from the central bank or from banks (interbank market) that have excess central bank balances.

In principle, the central bank provides the banking system with the central bank money it needs for minimum reserves and cash in circulation. On the supply side, lending by commercial banks is primarily dependent on the interest rate policy of the respective central banks, and on the demand side primarily on the willingness of the corporate sector to invest.

Individual evidence

1. ^ Deutsche Bundesbank: How money is made. April 25, 2017. Retrieved June 28, 2019 . 
2. ^ Bank of England: Money creation in the modern economy. March 14, 2014, accessed June 10, 2018 . 
3. ↑ Wolfgang Cezanne: General Economics. Munich 2005. p. 413.
4. ^ Paul De Grauwe: The European Central Bank as a lender of last resort. In: VoxEU.org. August 18, 2011, accessed June 10, 2018 . 
5. ↑ Handelsblatt: Despite the glut of money: ECB is not getting closer to inflation target . ( handelsblatt.com [accessed June 10, 2018]).
6. ↑ Patrick Bernau: Euro Tsunami: The great glut of money . In: FAZ.NET . ISSN  0174-4909 ( faz.net [accessed June 10, 2018]).
7. ^ Claus Köhler: Problems of central bank money control. In: Problems of the money supply control. Berlin 1978. P. 32 f - see excerpt: Monetary target achieved - demand and growth target missed. (PDF).
8. ↑ Bank of England, Quarterly Bulletin 2014 Q1: Money creation in the modern economy. P. 14:
   "Money creation in practice differs from some popular misconceptions - banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they 'multiply up' central bank money to create new loans and deposits. "
9. ↑ Bank of England, Quarterly Bulletin 2014 Q1: Money creation in the modern economy (PDF), p. 14:
   “The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. "
10. ^ Claus Köhler: Problems of central bank money control. In: Problems of the money supply control. Berlin 1978. ( Excerpts ; PDF).