The Pragmatic Capitalist points to a paper from the Federal Reserve on the theoretical basic of and empirical evidence for the “money multiplier”. BTW, that’s a completely different thing than the Keynesian multiplier. As I recall from the Intro to Econ course and the banking course I took many, many years ago, lending by banks is supposed to be indifferent between reserves and non-reserves which implies that the level of lending can be influenced by affecting either of those. Apparently, it ain’t necessarily so:
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. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks.
[…]
The results in this paper suggest that the quantity of reserve balances itself is not likely to trigger a rapid increase in lending. To be sure, the low level of interest rates could stimulate demand for loans and lead to increased lending, but the narrow, textbook money multiplier does not appear to be a useful means of assessing the implications of monetary policy for future money growth or bank lending.
That’s not particularly good news for Ben Bernanke, the chairman of the Fed, who has been hinting around lately about another round of quantitative easing. If the results of this paper are good, they mean that it’s unlikely that he can achieve his goals via quantitative easing. I wonder if he reads the papers produced by his own organization?
