M = m  MB (Money Supply = multiplier x Monetary Base,

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Determinants of the Money Supply
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Presentation transcript:

M = m  MB (Money Supply = multiplier x Monetary Base, Money Multiplier M = m  MB (Money Supply = multiplier x Monetary Base, where MB = Currency + Reserves) Deriving Money Multiplier R = RR + ER , (Reserves = Req. Res. + Excess Res.) RR = r  D, (Req. Res. = reserve ratio x Deposits) R = (r  D) + ER Adding C to both sides e=ER/D, c = C/D, assuming proportionality of ER & C vs. D R + C = MB = (r  D) + ER + C 1. Tells us amount of MB needed support D, ER and C 2. $1 of MB in ER, not support D or C MB = (r  D) + (e  D) + (c D) = (r + e + c)  D

1 D =  MB r + e + c M = D + (c D ) = (1 + c) D 1 + c M =  MB m = m < 1/r because no multiple expansion for currency and because as D  ER  Changes dm/dc, dm/de, dm/dr? Full Model M = m  (MBn + DL), where MBn is non-borrowed MB and DL are discount loans

Excess Reserves Ratio Determinants of e 1. i , relative Re on ER  (opportunity cost ), e  2. Expected deposit outflows, ER insurance worth more, e 

Factors Determining Money Supply

Money Supply

Determinants of the Money Supply

Deposits at Failed Banks: 1929–33

e, c: 1929–33

Money Supply and Monetary Base: 1929–33

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