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Money, Credit and Bank Behaviour: Need for a New Approach

Published online by Cambridge University Press:  26 March 2020

C.A.E. Goodhart
C.A.E. Goodhart*
Affiliation:
Financial Markets Group, London School of Economics
*
e-mail: caegoodhart@aol.com
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Extract

The standard approach, in teaching and textbooks, to explaining the determination of both the supply of money, and the provision of bank credit to the private sector, has been the money multiplier approach, whereby the Central Bank sets the high-powered monetary base, and then the stock of money is a multiple of that. The greatest book on Monetary History ever written, Friedman and Schwartz (1963), Monetary History of the United States, was constructed around this same analytical framework of the money multiplier, whereby M, the money supply, would increase by a large multiple of the change in the high-powered monetary base, H.

M=H⋅(1+C/D)(R/D+C/D)
Yet when the authorities in the major developed countries attempted to use this relationship to expand the money stock (and bank lending) by force-feeding the banks with base money (H), in the process of Quantitative Easing (QE) in 2009, the prior relationships collapsed.

Type
The UK Economy
Information
National Institute Economic Review , Volume 214 , October 2010 , pp. F73 - F82
Copyright
Copyright © 2010 National Institute of Economic and Social Research

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Footnotes

∗

I am grateful to Rafael Repullo for advice and comments and to Nelson Camanho Costa-Neto for research assistance. All remaining errors are my own.

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