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Excess Liquidity and the Usefulness of the Money Multiplier

Excess Liquidity and the Usefulness of the Money Multiplier
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Year:    2022

Author:    Berk, Jan Marc, van den End, Jan Willem

Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 4 : pp. 457–488

Abstract

We model the behaviour of banks as a main driver of the changing components of the money multiplier (MM). So we provide behavioural underpinnings for the supply and demand for inside and outside money. We illustrate how the creation of large outside money balances by central banks induces behavioural changes, creating an environment characterised by a low MM and low market interest rates. The low regime reflects a state in which the functioning of the financial system changes fundamentally due to excess supply of reserves. This so-called excess liquidity trap has adverse economic consequences, is persistent, and cannot be solved by monetary policy alone. We argue that government and supervisory measures taken during the pandemic provide an example of supporting policies that are effective in escaping the excess liquidity trap.

Journal Article Details

Publisher Name:    Global Science Press

Language:    English

DOI:    https://doi.org/10.3790/ccm.55.4.457

Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 4 : pp. 457–488

Published online:    2022-10

AMS Subject Headings:    Duncker & Humblot

Copyright:    COPYRIGHT: © Global Science Press

Pages:    32

Keywords:    monetary policy interest rates money multipliers E51 E52

Author Details

Berk, Jan Marc

van den End, Jan Willem

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Section Title Page Action Price
Jan Marc Berk / Jan Willem van den End: Excess Liquidity and the Usefulness of the Money Multiplier 457
Abstract 457
I. Introduction 457
II. Money Concepts 459
III. Model Framework 462
1. Market for Reserve Balances 463
2. Bank Loan Market 466
3. Deposit Market 468
4. Regimes in the Reserves Market 472
5. Frictions in the Bank Loan Market 473
6. Linking Inside and Outside Money 474
7. Impact of QE 475
IV. Money Multiplier Dynamics 478
1. Evolution across Time 478
2. Marginal Multiplier in the Pandemic 479
V. Discussion and Policy Implications 483
VI. Conclusion 484
References 485
Annex 487