Lecture6_new_free

# Lecture6_new_free - Lecture 6 Monetary Base Multiplier...

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Monetary Base Multiplier Readings: Bain and Howells (2009)-Chapter 2 M B = C p + D p C p + R (6.1) M B = C p /D p + D p /D p C p /D p + R/D p (6.2) M B = χ + 1 χ + ρ (6.3) M = B χ + 1 χ + ρ M = B ( m ) (6.4) Where χ is the public’s cash ratio and ρ is the bank’s reserve ratio. We assume that ρ < 1 if we have a fractional reserve system and χ is typically < 1 but does not have to be. The fraction on the right hand side of this equation, yields a multiplier ( m ) for the base, or a change in the base as follows. Δ M = Δ B χ + 1 χ + ρ (6.5) The public’s cash ratio χ is very likely dependent upon the rate of interest paid on deposits i m , which is inversely related to the amount of cash people choose to hold. If people can obtain a large amount of interest on their deposits, they are less likely to desire cash on hand. As Bain and Howells note, technology has led to a large reduction in χ as people can make transactions with only deposits. Also, shoe-leather costs , which measure transactions costs in obtaining cash versus deposits have fallen dramatically. χ

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Lecture6_new_free - Lecture 6 Monetary Base Multiplier...

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