What is a Deposit Multiplier?
The so-called money multiplier is the ratio of the money supply to total economic income (usually GDP). Measure the average transaction volume of unit currency. If the velocity of currency circulation in the economy is stable, then by simply setting the standard of the total amount, monetary policy can obtain any desired income level. In reality, the velocity of currency circulation is unstable, and the relationship between total economic income and the total amount of various currencies changes over time. [1]
Currency multiplier
- Currency multiplier
- in
- The currency and loan provided by the bank will pass several times
- assumed
- When it comes to currency multipliers, we must start with the currency creation of banks, and money creation must first talk about silver.
- Currency multiplier
- A bank is a profit-making enterprise. The reason why it absorbs deposits is to lend out deposits at a price higher than the deposit interest rate, and what it earns is the spread between deposits and loans. So it's impossible for banks to put all their money in their hands and wait for depositors to withdraw money. But also reserve a part to prevent extraction. This is part of the bank's reserve system. There is a statutory reserve ratio stipulated by the state as rr, which means that the bank's reserve ratio must not be lower than this number.
- Then suppose someone A deposits 1,000 yuan in Bank A and the statutory reserve ratio is 20%. Bank A will leave 200 for the reserve and will loan 800 to B.
- B deposits this 800 yuan into Bank B, Bank B reserves 160 yuan as a reserve, and lends 640 yuan to C. This cycle continues, and the deposits in the bank are multiplied. A total of 1000 * 1/20% (summation of the proportional series 1000 + 800 + 640 + ...) Of course, banks have different credit standings and different withdrawal pressures, so some banks have to put more With some money in hand, the ratio of these excess currencies to the total assets of the bank is the excess reserve ratio, recorded as e, then obviously the total amount of money created becomes 1000 * 1 / (20% + e)
- Of course, non-check deposits such as current and fixed deposits and check deposits face different withdrawal pressures, so their statutory deposit reserve ratios are also different. Generally, the statutory deposit reserve ratio of non-check deposits is lower. Assume that the ratio of non-check deposits to check deposits is t, and the statutory reserve requirement ratio for non-check deposits is RR, and RR * t is added to the denominator of non-check deposits. Moreover, it is impossible for people to deposit all the cash, and to leave some cash, if the ratio of the left cash to the check deposit is c, which is also called the cash leakage rate, then add a c to the denominator.
- The base currency is the cash in circulation plus the reserve in the bank, recorded as C + R, and the money supply M is the cash in circulation plus the check deposit in the bank (here, the narrow currency M1) is recorded as C + D, then The money multiplier is defined as the base currency as m, then m = (C + D) / (C + R), where R = D * rr (the legal reserve for check deposits) + D * RR * t ( Statutory deposit reserve for non-check deposits) + D * e (excess reserve reserve for check deposits) and C / D = c (cash leakage rate), then m = (1 + c) / rr + RR * t + e + c
- This leads to the currency multiplier of narrow money. In order to control the money supply, the central bank adjusts the base money in the open market to control the money supply. You can also adjust the statutory deposit reserve ratio to adjust the currency multiplier.