Our Textbooks are Wrong: How an Increase in the Currency-Deposit Ratio Can Increase the Money Multiplier

Abstract

I show that when deposits are less than bank reserves the money multiplier is increasing in the currency-deposit ratio. This result contradicts textbooks in intermediate macroeconomic theory and money & banking, which claim that the money multiplier is always decreasing in the currency-deposit ratio. I also propose an alternative framework in which the money multiplier and circulating currency always have a negative relationship. This approach explicitly assumes that the monetary base is constant, which is consistent with an analysis focused exclusively on the behavior of private banks and the public.