A Model of QE, Reserve Demand and the Money Multiplier

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Title: A Model of QE, Reserve Demand and the Money Multiplier
Authors: Ryan, EllenWhelan, Karl
Permanent link: http://hdl.handle.net/10197/12010
Date: Feb-2021
Online since: 2021-03-08T12:08:25Z
Abstract: Quantitative easing programmes 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 micro-simulation 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 US 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.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Start page: 1
End page: 34
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP2021/07
Copyright (published version): 2021 the Authors
Keywords: Quantitative easingCentral banksMoney multiplier
JEL Codes: E51; E52; E58
Language: en
Status of Item: Not peer reviewed
This item is made available under a Creative Commons License: https://creativecommons.org/licenses/by-nc-nd/3.0/ie/
Appears in Collections:Economics Working Papers & Policy Papers

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