Editing Money multiplier (section)

{{Short description|Ratio of money supply to central bank money}}
{{Use dmy dates|date=June 2023}}

In [[monetary economics]], the '''money multiplier''' is the ratio of the [[money supply]] to the [[monetary base]] (i.e. [[central bank]] money). 
In some simplified expositions, the monetary multiplier is presented as simply the [[Multiplicative inverse|reciprocal]] of the [[required reserve ratio|reserve ratio]], if any, required by the central bank. More generally, the multiplier will depend on the preferences of [[household]]s, the [[bank regulation|legal regulation]] and the business policies of [[commercial bank]]s - factors which the central bank can influence, but not control completely.

Because the money multiplier theory offers a potential explanation of the ways in which the central bank can control the total money supply, it is relevant when considering monetary policy strategies that target the money supply. Historically, some central banks have tried to conduct monetary policy by targeting the money supply and its growth rate, particularly in the 1970s and 1980s. The results were not considered satisfactory, however, and starting in the early 1990s, most central banks abandoned trying to steer money growth in favour of [[Inflation targeting|targeting inflation]] directly, using changes in [[interest rate]]s as the main instrument to influence economic activity. As controlling the size of the money supply has ceased being an important goal for central bank policy generally, the money multiplier parallelly has become less relevant as a tool to understand current monetary policy. It is still often used in introductory economic textbooks, however, as a simple [[shorthand]] description of the connections between central bank policies and the money supply.