Posted: September 17th, 2017

Sorting among the Multipliers

To contemplate the monetary policy issues raised by variability in components of the M1 and M2 multipliers, read and then discuss the following case study:

“Sorting among the Multipliers”

The head of the central bank of a small African nation is trying to determine whether the M1 or M2 money multiplier has been more stable during recent years, in the hope of deciding which monetary aggregate to emphasize during the next few years. Studies by economists at the central bank indicate the following:
•The ratio of excess reserves to transactions deposits has been highly variable and is likely to remain equally volatile during the next several years.
•The currency-deposit ratio has been and is likely to remain relatively stable.
•The ratio of non-transactions deposits to transactions deposits increased by a factor of 10 during the past five years and may increase by an equal magnitude during the coming five years.

One final piece of information is that the required reserve ratio is equal to 20 percent for both transaction and non-transaction deposits.

Given this information, which monetary aggregate should the central bank head choose to emphasize?


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