Money Multiplier Research Articles

Financial and market risks of bitcoin adoption as legal tender: evidence from El Salvador

Bitcoin adoption as a legal tender threatens a financial crisis because of the lack of regulatory frameworks and systems for exchanging Bitcoin into local currencies. This study analyzes monthly data from 2010 to 2022 using a structural vector autoregressive model, estimating Bitcoin’s pass-through into remittance, money multiplier, the US Dollar index, and gold price. The results show that Bitcoin prices decrease the money multiplier and gold prices in both the short and long run, while remittances moderately increase in the long run. The implication of these results suggests the potential for international business opportunities to stimulate the credit, savings, and investment monetary policy channel. The results are robust to alternative SVAR identification strategies.

Evektivitas Sanksi Pidana Terhadap Praktik Pengganda Uang

The practice of money multipliers is a common phenomenon in Indonesia. This practice exploits public trust to achieve personal gain. The negative effects of this practice include financial loss and exploitation. Indonesian criminal law has regulated fraud and embezzlement, which can be applied to ensnare money multiplier shamans. However, the effectiveness of criminal law in overcoming this practice is still questionable. However, the effectiveness of criminal law in dealing with this practice is still unclear. This study aims to analyze the effectiveness of criminal law on the practice of money multiplier shamans. This study uses a normative legal analysis method using a doctrinal and empirical approach. The results of the study indicate that criminal law has the potential to be an effective instrument in overcoming the practice of money multiplier shamans. However, there are several factors that can hinder the effectiveness of criminal law, such as Lack of public awareness of criminal law, Difficulty in proof. To increase the effectiveness of the law in responding to money multiplier practices, steps are needed such as increasing public awareness of the law, increasing the capacity of law enforcement officers, and strengthening the law enforcement system.

Modern Monetary Dynamics: Bids of Money Without Banks, Money Supply Theory, Money Multiplier, and Policy Implications

This research explores modern monetary dynamics with a focus on money supply without bank intermediation, money supply theory, the money multiplier mechanism, and the policy implications arising from this phenomenon. In the contemporary financial context, the emergence of financial technology (fintech) and cryptocurrencies has changed the traditional landscape of money supply, allowing money supply to occur without the direct role of banks. This article discusses the basic concepts of money supply theory, including the factors that affect the money supply in the economy. Furthermore, this study analyzes the money multiplier mechanism, which describes how money injected into the banking system can result in a larger increase in the money supply. Using both theoretical and empirical approaches, this study assesses the monetary policy implications arising from changes in the way money supply occurs, including the challenges for monetary authorities in controlling inflation and financial stability. The results show that this transformation in money supply requires innovative and responsive policy adaptations to maintain the effectiveness of monetary policy in maintaining economic stability.

Research on the Impact of Digital Currency on the Money Multiplier: Insights from the Money Multiplier Formula

This study examines the impact of digital currencies on the money multiplier. Through a comprehensive analysis of various factors, including cash leakage rate, deposit reserve ratio, time deposit ratio, and the proportion of digital currencies in circulation, the study reveals important insights into the relationship between digital currencies and the money multiplier. The findings indicate that the adoption of digital currencies reduces cash leakage rate by providing an alternative to traditional cash, thereby expanding the money multiplier. Digital currencies also influence deposit reserve requirements, either decreasing or increasing the need for reserves, depending on regulatory responses. Furthermore, digital currencies affect the proportion of time deposits, as they lower transaction costs and make long-term deposits more attractive, contributing to the expansion of the money multiplier. Importantly, the study uncovers a positive relationship between the proportion of digital currencies and the magnitude of the money multiplier. As digital currencies gain prominence and their share in the currency system increases, their impact on the money multiplier becomes more pronounced.The study highlights the implications for policymakers, central banks, and financial institutions, emphasizing the need for adaptive strategies in response to the changing landscape of digital currencies. Further research is encouraged to deepen our understanding of the broader implications of digital currencies on the economy and financial system.

ANALISIS PENGARUH INSTRUMEN PEMBAYARAN NON-TUNAI (APMK DAN UANG ELEKTRONIK) TERHADAP MONEY MULTIPLIER

The increasing use of non-cash payment instruments in Indonesia, such as Card Payment Instrument (APMK) and electronic money, shows public awareness and confidence in switching from cash. This has an impact on the money multiplier. The money multiplier plays an important role in the formation of money supply and monetary control. The stability of the money multiplier can provide greater opportunities for Bank Indonesia to implement policies effectively in influencing the supply of money in circulation so the ultimate goal of monetary aggregates can be achieved and a conducive atmosphere for the economy is created. This research aims to determine the influence of ATM+Debit card, credit card and electronic money variables on the money multiplier in Indonesia. In connection with this, the author uses the Error Correction Model (ECM) as an analysis method in this research. The research results show that the Card Payment Instrument (APMK) variable through the nominal transactions of ATM+Debit card and credit card and the nominal transactions of electronic money have significant positive effect on the value of the money multiplier in Indonesia in both the short and long term. It means when the nominal variable for ATM+Debit card, credit card, and electronic money transactions increases, the value of the money multiplier will also increase and vice versa. The increasing use of non-cash payment instruments in Indonesia, such as Card Payment Instrument (APMK) and electronic money, shows public awareness and confidence in switching from cash. This has an impact on the money multiplier. The money multiplier plays an important role in the formation of money supply and monetary control. The stability of the money multiplier can provide greater opportunities for Bank Indonesia to implement policies effectively in influencing the supply of money in circulation so the ultimate goal of monetary aggregates can be achieved and a conducive atmosphere for the economy is created. This research aims to determine the influence of ATM+Debit card, credit card and electronic money variables on the money multiplier in Indonesia. In connection with this, the author uses the Error Correction Model (ECM) as an analysis method in this research. The research results show that the Card Payment Instrument (APMK) variable through the nominal transactions of ATM+Debit card and credit card and the nominal transactions of electronic money have significant positive effect on the value of the money multiplier in Indonesia in both the short and long term. It means when the nominal variable for ATM+Debit card, credit card, and electronic money transactions increases, the value of the money multiplier will also increase and vice versa.

Creditor rights, collateral reuse, and credit supply

Securities dealers receive mortgages as collateral for credit lines provided to mortgage companies and reuse the same collateral to borrow money. Exploiting the 2005 BAPCPA rule change, which granted mortgage collateral preferred bankruptcy treatment, I find that strengthening creditor rights increases dealers’ collateral reuse. Increasing collateral reuse creates a money multiplier that increases credit supply. Using a novel dataset linking dealers to the mortgage companies they fund reveals that post-BAPCPA, dealers supply additional credit to mortgage companies by increasing credit lines and relaxing restrictions on collateral securing them. In response, mortgage companies increase origination volume and shift into riskier products.

A Mathematical Approach to the Money Multiplier Analysis on Indonesian 1997–1998 Monetary Crisis

In crisis moments, massive liquidity supports, extensive cash withdrawal, and large reserve hoarding can all lead to the change in monetary base, currency ratio, and reserve ratio respectively. In turn, all these disruptions could cause money supply to change. This research aims to find out which factor (among the change in monetary base, currency ratio, and reserve ratio) became the main causal factor of increasing money supply in Indonesia during 1997–1998 crisis. The method follows mathematical equation models used by Friedman & Schwartz (1963) and Stauffer (2006) in analyzing Great Depression in the US. This research has found that the change in monetary base in Indonesia during 1997–1998 crisis became the main cause of increasing money supply in that period. This result is consistent with what the other literatures had said.

Theory and practice of overcoming an economic crisis (on the Nobel Prize in economics in 2022)

The article analyzes the Nobel Prize winners in economics of the 2022’s research results. The author explains the meaning of the terms which are necessary for the analysis: money multiplier, liquidity, mortgage, mortgage bonds. In addition, the psychological factor in the formation of critical situations in the banking sector is considered the way it was interpreted by the winners. The article analyzes the reasons which led to the lower position of the USSR’s and modern Russia’s money multiplier compared to the position of the multiplier of the countries with developed market economies including, first of all, the USA. The paper also discusses the role which the “real bills doctrine” played in the activity of the US Federal Reserve System and Ben Bernank personally. Ben Bernank’s cautious line of behavior during the overcoming the 2008 crisis is described. The model of liquidity dynamics which belongs to the laureates and that is vividly discussed in the scientific community is considered in detail.

Does PLS in Islamic banking limit excessive money creation?

PurposeBank lending is the major source of monetary expansion. Bank-led money creation is a key issue in both conventional and Islamic financial systems. The purpose of this paper is to examine the issues related to Islamic banking money creation. In this conceptual paper, the authors investigate the involvement of profit and loss sharing (PLS) in money creation and especially how can PLS limit money creation “out of nothing.” In this regard, the authors examine the potential of the PLS principle in tackling the excessive money creation phenomenon.Design/methodology/approachThis study uses a normative approach regarding Islamic bank money creation that fits Sharia directives. In fact, this study discusses “what ought to be,” that is, the values and norms of PLS money creation that impede excessive money creation.FindingsOverall, Islamic banks create money differently compared to conventional ones. Especially, by avoiding a purely financial intermediary, money creation under the PLS principle sustains a strong relationship with the real economy and leads to a lower money multiplier. Therefore, PLS mechanisms allow financing through real assets and not credit assets “out of nothing.” This could prevent excessive money creation from causing harmful effects on indebtedness and financial instability.Practical implicationsPLS offers a valuable resolution for banking system money creation through the optimization of Islamic bank financing by facilitating the separation of the monetary function from the credit one. This reform thought reinforces the stability value of money allowing it to fully perform its functions with reference to the directives of Sharia. This especially allows the integrity and purchasing power of money, the reduction of the gap between the evolution of both real and financial economies and, consequently, the indebtedness and crisis. It is recommended to promote PLS financing by reforming institutional and regulatory constraints.Originality/valueThis study addresses the contemporary issue of money creation by Islamic banks through the PLS approach. The conceptual framework of this paper highlights the reformist role of PLS in limiting money creation through Mudarabah approach within fractional reserve banking.

Money Supply Determination Process for Japan

Abstract This study re-investigates the money supply determination process for Japan. The methodology of this study, which differs from previous studies, is constructed on the assumption of potential nonlinear (asymmetric) relations between money supply and monetary base via money multiplier. To this aim, the nonlinear autoregressive distributed lag (ARDL) model by Shin, Yu and Greenwood-Nimmo, (2014) is applied. This model allows us to examine the endogeneity and exogeneity of the money supply determination process via the linkage of the money multiplier under expansionary and contractionary monetary policies of the Bank of Japan (BOJ) separately in a nonlinear manner. The main findings of the study indicate that the money supply determination process is endogenous with an unstable money multiplier for Japan for M1. However, this endogeneity in the BOJ’s contractionary monetary policy is more than its expansionary policy. This can be interpreted that the BOJ’s expansionary monetary policy has more of a determining role on money supply determination than its contractionary monetary policy. Additionally, the same findings indicate that the BOJ has more power to determine M1 than M2. This result can be interpreted that when the measure of money broadens the BOJ’s controllability on money supply decreases. In contrast, in our Canadian study (Ongan and Gocer, 2019) with the same nonlinear ARDL model, we concluded that the Canadian central bank (BOC) was able to determine money supply exogenously for M1, unlike the Japanese central bank (BOJ), and the money multiplier was stable for Canada.

Existence of the Money Multiplier in a Developing Economy: A Case of Saudi Arabia

Existence of the Money Multiplier in a Developing Economy: A Case of Saudi Arabia

Existence of the money multiplier in a developing economy: a case of Saudi Arabia

In this study, cointegration methods are used to test the existence of the money multiplier model in Saudi Arabia for 1997m1-2020m4 and subperiods before and after the 2008 global financial crisis. Residual-based tests support broad (M2 and M3) multipliers over the full sample and pre-crisis period, albeit the M3 multiplier performs better than the M2 multiplier. Johansen's vector autoregression (VAR) and Pesaran et al. (2001) autoregressive distributed lags (ARDL) cointegration and coefficient restriction tests reveal that broad multipliers perform well. Narrow and broad multipliers are mean-reverting in the pre-crisis period, and the M3 multiplier is mean-reverting over the full sample. These multipliers are stable in a dynamic framework. Therefore, the Saudi Arabian Monetary Authority (SAMA) can control money stock and inflation by controlling base money. Narrow and broad multipliers are also predictable and broad monetary aggregates can influence monetary policy.

MONEY-CREDIT MULTIPLICATION AND PROBLEMS OF INFLATION

The article is devoted to the study of the dynamics of indicators of monetary and credit multiplication in Ukraine over the past 20 years and the empirical verification of a number of theoretical propositions regarding the relationship between the dynamics of the money supply and inflation. To assess the state of monetary and credit multiplication, it is proposed to use three indicators: deposit multiplier; credit-money multiplier, and actual money multiplier. Methodological approaches to the calculation of the indicated indicators are reasoned. A method of calculating the deposit multiplier is proposed under the condition that the country uses a zero rate of the mandatory reserve norm and a differentiated approach to the formation of reserves for individual types of deposits (short-term and long-term, in national or foreign currency, etc.). The factors of the credit-money multiplier are analyzed, among which special and general reserves are allocated, which are formed both at the request of the central bank and at the initiative of commercial banks. The deposit multiplier and the actual money multiplier are found to have a fairly steady upward trend over the past 20 years. There is also a fairly stable connection in the dynamics of these indicators. However, they differ significantly in quantity. This means that there are numerous factors that prevent the realization of the credit potential of banks, which has increased as a result of the reduction of mandatory reserve requirements. In particular, the simultaneous reduction of the reserve requirement ratio and the increase of the discount rate are multidirectional in their impact on monetary and credit multiplication. It was found that the practice of state monetary and credit regulation is contradictory, as its tools are used in such a way that they cancel each other out and lead to undesirable overall economic results. The article empirically verifies the theoretical proposition regarding the relationship between the money supply and inflation rates. Comparisons of adjusted money supply and monetary base (growth rates of these indicators divided by GDP growth rates) and inflation rates did not show any significant relationship. The obtained result should not be considered as a denial of the correctness of the theoretical propositions. In fact, this is a reflection of inconsistent real economic policy, which destroys the usual mechanisms of market regulation and makes it difficult to predict the results of the functioning of the national economy

A Model of QE, Reserve Demand, and the Money Multiplier

AbstractQuantitative easing (QE) programs have driven unprecedented expansions in the supply of central bank reserves around the world over the past two decades, fundamentally changing the implementation of monetary policy. The collapse in money multipliers following QE episodes has often been interpreted as implying banks are happy to passively hold most of the reserves created by QE. This paper develops a simple microsimulation model of the banking sector that adapts the traditional money multiplier model and allows for bank reserve demand to be inferred from monetary aggregates. The model allows the use of unwanted reserves by banks to play out over time alongside QE purchases and incorporates both significantly higher reserve demand after 2008 and capital constraints. With these additions, the model explains the persistently lower money multipliers seen in the United States following QE, as well as the growth in commercial bank deposits. The model suggests the demand from banks for reserves has increased substantially since the introduction of QE but not to the point where banks are passively absorbing all newly created reserves.

Excess Liquidity and the Usefulness of the Money Multiplier

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.

Operational risk management of using electronic and mobile money

The extensive use of electronic and mobile money causes additional risks, which complicates the work of electronic money issuers (EMIs) and the functioning of payment systems. The paper aims to investigate operational risk management in the process of using electronic and mobile money. A classification of operational risk types was carried out and the forms of their manifestation in payment systems using electronic and mobile money were characterized. The list of key risk indicators has been compiled to assess the operational risk factors of payment systems using mobile and electronic money; a classification of costs (losses) as a result of the implementation of operational risk events is proposed, dividing them into direct and indirect. Based on the statistics of the International Monetary Fund and the National Bank of Ukraine, the use of electronic and mobile money in certain countries of the world is analyzed. The results on the intensity of electronic money use are presented, and the value of the electronic money multiplier in Ukraine is calculated. To improve operational sustainability of EMIs, a general scheme for organizing the operational risk management process in payment systems using electronic and mobile money is presented. Particular attention is paid to the regulatory and supervisory measures aimed at supporting the operational sustainability of EMIs and payment systems under their control. The issues discussed in this paper are relevant for the debate directed at the implementation of balanced approaches to operational risk management in the process of using electronic and mobile money in developing and emerging economies.

Macro-Econometric Model: Keynesian-Monetarist Synthesis of the International Balance of Payments (The Indonesian Case)

The study of the Keynesian-monetarist synthesis macroeconomic model on Indonesia’s balance of payments combines the goods market and money market approaches to Indonesia’s balance of payments theory. This study used three models of shortness to balance payments: Keynesian, monetarism, and synthesis of Keynesian and monetarism methods. Data was used from 1998 to 2019 from International Monetary Fund, international financial statistics, and balance sheet book from Bank Indonesia statistics report. The data is analyzed using reduced-form regression analysis. The results show that based on the monetarist approach to the balance of payments, it is found that the effect of the money multiplier on the international balance of payments; the magnitude of which is strongly influenced by the size of the high-powered money or the monetary base; has a negative effect on the international balance of payments, while the Net Domestic Assets has a positive effect on the international balance of payments. In the Keynesian model of the international balance of payments, it is found that government spending, world income, and domestic prices have a negative effect on Indonesia’s balance of payments. Based on the Keynesian-monetary syntheses approach to the balance of payments, it is found that government spending and domestic prices have a negative effect on the international balance of payments; the higher the level of government spending and the level of domestic prices will reduce foreign exchange reserves. At the same time, an increase in foreign income, in this case, an increase in US GDP, will increase Indonesia’s foreign exchange reserves.

Shadow Banks and the Collateral Multiplier.

With an emphasis on contributing to macroeconomic pedagogy, we examine the collateral multiplier by comparing it to the traditional money multiplier in a simplified framework of traditional banking and shadow banking in which government bonds are the core assets. While the money multiplier is a measure of the ability of the banking system to intermediate sovereign debt by creating deposits, the collateral multiplier is a measure of the shadow banking system’s ability to intermediate sovereign debt by creating shadow money. It also measures the degree of reuse of sovereign debt as collateral. In this setup, the collateral multiplier is defined as the ratio between dealer banks’ matched book repo activity relative to their trading book. Using the New York Fed’s Primary Dealer Statistics data, we empirically estimate the collateral multiplier for US Treasury repo collateral. Our model and empirical results shed light on the transmission mechanisms of monetary policy channeled through shadow banks and on the US Treasuries market turmoil induced by COVID-19 in March 2020.

How are Banks and the Fed Linked? Teaching Key Concepts Today

ABSTRACT This article walks through the roles of banks and the Federal Reserve (the Fed) in the financial system and describes the key linkages between the two, using current concepts. Because many introductory economics textbooks are not up-to-date on key concepts, we highlight two crucial mistakes often taught in the classroom: (1) using an outdated description of Fed operations that rely on open market operations instead of focusing on the Fed’s administered interest rates, and (2) relying on the money multiplier equation, which broke down over time and is now no longer definable. We provide recommendations for the key themes that should be part of a current introductory economics curriculum and note many resources that are available for instructors seeking to update their materials.

Modern Monetary Theory: The Right Compass for Decision-Making

In the November/December 2021 issue of Intereconomics, Françoise Drumetz and Christian Pfister examine Modern Monetary Theory (MMT) and approach it from the policy consequences that would follow. This paper is a reply to Drumetz and Pfister. It restates the core of MMT and offers some suggestions for central banks. Theories are explanations of what we see, and MMT describes money creation and destruction. Hence, MMT cannot be and is not a political manifesto. In contrast to most other theories of money, MMT is falsifiable in its core statements, which are based on a balance sheet approach to macroeconomics. Since many central banks already educate the public about the creation of modern money through bank lending, it would be most welcome if they would do the same for the creation of modern money through government spending. Here, MMT and central bankers can find common ground to move forward and leave the theory of loanable funds and that of the money multiplier behind.