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Robert B, Barsky ; James, DeLong. (1991) Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard. In: The Quarterly Journal of Economics. RePEc:tpr:qjecon:v:106:y:1991:i:3:p:815-36.

Essays on the great depression, By Ben Bernanke



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Measurement of inflation is discussed in Ch.2, p.45-50; Money growth & Inflation in Ch.7, p.266-269; Keynesian business cycles and inflation in Ch.9, p.308-348

Measurement of inflation is discussed in Ch.2, p.22-32; Money growth & Inflation in Ch.4, p.81-107; Keynesian business cycles and inflation in Ch.9, p.238-255

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https://en.wikipedia.org/w/index.php?title=History_of_the_United_States_public_debt&diff=prev&oldid=509708311

I just read your thoughtful reply to my comment on the FRB talk page. Please excuse me for the wrong misconceptions that I had when I made that reply. I was writing in haste, and in my mind, had conflated what you and Ressigo had written. It may be that we largely agree about the essentials of how the monetary system works. I hold, as far as I know, a completely mainstream viewpoint about this topic. Let me outline what I believe the general mainstream understanding to be (which is also my viewpoint), and you can point out where you disagree with me (either about what mainstream understanding is, or about where mainstream understanding should be supplemented):


 * The money multiplier process occurs essentially as outlined in the textbooks. New high powered money is introduced, and the broad money supply is expanded through the lending and re-lending activities of commercial banks.
 * Commercial banks lend out some fraction of the excess reserves which they hold, and do not lend out more than the excess reserves they have on hand, unless they have made arrangements to borrow funds from another institution. It takes many rounds of lending and re-lending for the full multiplier effect to play out.
 * Holding high-powered money constant, the amount of broad money in the system is limited by either the statutory reserve requirements or other financial ratios (e.g. Basel II capital requirements) imposed by the central bank (or other regulatory agencies).
 * The actual multiplier is not equal to 1/rr (as defined in some textbooks). 1/rr is a conceptual simplification, much like escape velocity is a simplification (in that it doesn't take into account direction of movement, air resistance, the rotational velocity of the Earth, launching from different altitudes, etc.). The three main issues that it ignores are:
 * Cash held by the public, and excess reserves held by the banks, reduces the actual multiplier.
 * In many jurisdictions, the reserve requirement is not binding, instead the Basel II related capital requirements are what determine the multiplier.
 * There are several multipliers, one for each definition of broad money (M1, M2, M3).
 * The demand for money influences the supply of money:
 * Most central banks target interbank interest rates, not the quantity of money. An increase in the demand for money will cause interest rates to rise, and so cause an expansion of money supply as the central bank attempts to reduce the interest rate.
 * A spike in money demand can cause banks to run out of ready cash, in such a situation (essentially a financial crisis) the central bank will step in to lend directly to the commercial banks (as lender of last resort), thus expanding the money supply directly.
 * The fact that central banks respond and largely accommodate changes in money demand is related to the endogenous money models of the post-Keynesians.

As it stands, I think the article could make clearer exactly what simplifications are being made, and could discuss heterodox views a bit more. However, I think a more in-depth discussion about issues surrounding the money multiplier is best reserved for other pages (e.g. Basel II, money multiplier). Please let me know if we disagree on any significant matters.

Regards, LK (talk) 08:22, 10 December 2010 (UTC)


 * I appreciate you taking the time to see where we both stand on these topics. You clearly know a lot more than I do about monetary theory - I tend to be more of an ad hoc editor, using wikipedia to learn about a topic, researching that topic outside of wikipedia where wikipedia falls short, then going back and adding the information I find.
 * In any case, most of what you said makes sense to me. There are a couple points I think might also belong in there:
 * From what I read, it seems that (at least in the US) the reserve requirement doesn't require that banks create loan accounts from actual reserves, just that their loan accounts don't exceed a certain multiple of their reserves (the difference between creating a $9 loan account from a $10 deposit and creating a $100 loan account from a $10 deposit). If this is true (something I'm heavily leaning toward believing, but am not fully convinced of yet), then it would mean that the money multiplier as a limit isn't true - rather the demand for and base-supply of money is what limits loans - and thus the money supply (the only thing that really makes sense to me - thats how all of economics works).
 * I guess my other point was about demand being the main determinant of the money supply. But I suppose its not really a separate point.
 * So the first part of that idea can be sourced. The second part is not something I've seen much in what little I've read, but hopefully some sources can be found that will either confirm or deny it (or both?).
 * What I'm really interested in is to what extent all this stuff about expanding the money supply matters at all. And by "matters at all", I really mean - does it affect inflation? As far as I can tell, not all increases in money supply (or in all types of money supplies) cause inflation. And who really cares about changes in the money supply if it doesn't affect the currency? I'm much less hopeful of finding a source for that idea. Fresheneesz (talk) 02:56, 11 December 2010 (UTC)


 * To answer your first point. What happens is different in different jurisdictions; but in general, the central bank or other bank regulating authority periodically checks to see if a bank is keeping enough reserves and meeting its capital adequacy ratios. All a bank has to do is to make sure that it has enough reserves and meets its capital adequacy ratios at the time of the check. The frequency of these checks are different in different countries, and may happen once a week, twice a month, or once a month. The consequences are severe if a bank ever fails one of these checks.
 * Given this framework, suppose that a bank receives $1000 in new deposits today, giving it $50 in required reserves and $950 of excess reserves. It's Monday today, and it needs to meet its required reserve ratio on Friday. Does it:
 * a) Lend out $950 in new loans, and re-lend new deposits as they come in, or
 * b) Lend out $20,000 in new loans, in the expectation that all the money that it lends out will be redeposited back before Friday, so that when Friday comes it will have $1000 in required reserves and $20,000 in new loans.
 * I can't state for all banks in every jurisdiction everywhere, but for the banks I've experience of, I can assure you the answer is a). Keep in mind that loans are almost certainly immediately used to pay someone else once the loan is issued, and so the bank will not have enough cash to meet its obligations if it were to lend more than $1000. This is unless i) the bank is very lucky, so that almost every loan made is used to pay someone with a check, and b) all payees are also customers of the same bank, so that funds remain in the bank. Keep in mind also that the person being paid by the loan taker may very likely i) keep the money in cash, or ii) deposit it into another bank, or iii) take the money out of state, or iv) take the money out of the country.
 * But more to the point for Wikipedia, all textbooks say a). So any argument that b) occurs because of the way one reads banking regulations is original research. Also, regardless of whether a) or b) occurs, the money multiplier still functions, and still places a limit on lending. It's just the speed of the multiplier that's changed.
 * I'm not sure what your second point is, but I'll be glad to answer it when you have it clear in your mind. As so whether money supply increases have an effect on inflation, the answer is complicated. For the long run inflation rate, (i.e. over 10 years, say) most economists will agree that the increase in the price level over the last ten years depends almost entirely on i) the growth of the money supply, ii) the growth of the real economy, and iii) to a much lesser extent, any financial innovations that affect the real demand for money. In the short run, Keynesians would argue that changes in the inflation rate depends on whether Demand exceeds or is less than Supply for the economy as a whole. There are also various heterodox views on this issue.
 * LK (talk) 08:27, 13 December 2010 (UTC)