Sunday, January 13, 2013

Quote of the Week...

…is from the Federal Reserve Board’s Finance and Economics Discussion Series paper, “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” (by Seth B. Carpenter and Selva Demiralp, May 2010):
Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.
If staff members at the Federal Reserve are aware of the money multiplier myth than surely Bernanke and the other board members have heard the arguments. Unfortunately most mainstream economists, especially monetarists, continue to promote monetary stimulus as if the old regime still persists.  

Related posts:
Fullwiler - "The main shortcoming of the money multiplier paradigm"
IOR Killed the Money Multiplier
Fighting for Endogenous Money on Two Fronts


  1. Wait, am I to understand the quote as saying "There is no multiplier, and apparently nothing we do makes a consistent difference such that we could intentionally create various outcomes?"

    1. The money multiplier referred to here and in most textbooks discusses the affect on NGDP of a change in the monetary base (money supply). So the quote is saying that changes in the monetary base (reserves) do not have a direct, measurable impact on NGDP. By extension, the Fed's actions in altering the size of the monetary base will not make a consistent difference that could be exploited to create specific medium-to-long run outcomes.

  2. Joshua, given that Bernanke knows what Seth and Selva know, it seems that the question is Why does Bernanke not adopt a different policy?

    Two answers come to mind. First, the answer that everyone gives, something about banksters and corruption and bile. Second, the answer that no one gives, which is that Bernanke sees no viable alternative.

    He does all sorts of bold and innovative, ineffective things; he cannot get out of the box. He needs some help. He needs a viable alternative.

    1. A viable alternative would have been to keep interest rates at zero and then forgo the past few rounds of QE. That option would have left higher yielding assets in the private sector, increasing interest income above current levels. Aside from ZIRP, this would have been a very passive form of monetary policy.

      Do you think Bernanke could have maintained his position this long by pursuing that option? Or maintained his position among economists after not following his own work?