The Myth Of The Money Multiplier by Barkley Rosser @ EconoSpeak
That Fed control over the money supply has become a phantom has been quite clear since the Minsky moment in 2008, with the Fed massively expanding its balance sheet without much resulting increase in measured money supply. This of course has made a hash of all the people ranting about the Fed "printing money," which presumably will lead to hyperinflation any minute (eeek!). But the deeper story that some of us were unaware of is that apparently this disjuncture happened a long time ago. Even so, one of our number pointed out that official Fed literature and even many Fed employees still sell the reserve base story tied to a money multiplier to the public, just as one continues to find it in the textbooks, But apparently most of them know better, and the money multiplier became a myth a long time ago.Woj’s Thoughts - Rosser refers to a paper from the Federal Reserve Board’s Finance and Economics Discussion Series that was the source of a recent Quote of the Week:
“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.As I noted in that post:
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.Fortunately the economics professors at James Madison stumbled across this paper and were convinced of its conclusion. Hopefully they will join a minority of current economists in training future economists to recognize the money multiplier does not exist.
Fullwiler - "The main shortcoming of the money multiplier paradigm"
IOR Killed the Money Multiplier
Fighting for Endogenous Money on Two Fronts