Editing Money multiplier (section)

== Monetary policy in practice ==
{{See also|Monetary policy}}
Whereas used in many textbooks, the realism of the money multiplier theory is questioned by several economists, and it is generally rejected as a useful description of actual central bank behaviour today, partly because major central banks generally have not tried to control the monetary supply during the last decades, hence making the theory irrelevant, partly because it is doubtful as to how large an extent the central banks would be able to control the money supply, should they wish to. The last question is a matter of the stability of the money multiplier.

===Historical attempts to steer the money supply===

Historically, central banks have in some periods used strategies of trying to target a certain level or growth rate of money supply, in particular during the late 1970s and 1980s,  inspired by [[monetarism|monetarist theory]] and the [[quantity theory of money]].<ref name="Historical">{{cite web |title=Federal Reserve Board - Historical Approaches to Monetary Policy |url=https://www.federalreserve.gov/monetarypolicy/historical-approaches-to-monetary-policy.htm |website=Board of Governors of the Federal Reserve System |access-date=19 October 2023 |language=en |date=8 March 2018}}</ref><ref>{{cite web | first = Ben | last = Bernanke | author-link = Ben Bernanke | title = Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective | publisher = Federal Reserve | year = 2006 | url = http://www.federalreserve.gov/newsevents/speech/bernanke20061110a.htm }}</ref> However, these strategies turned out to not work very well and were abandoned again.<ref name=Blanchard/> In the United States, short-term interest rates became fourfould more volatile during the years 1979-1982 when the Federal Reserve adopted a moderate version of monetary base control, and the targeted monetary aggregate at the time, M1, even increased its short-term volatility.<ref name=Goodhart>{{cite book |last1=Goodhart |first1=Charles |author-link1= Charles Goodhart |title=The New Palgrave Dictionary of Economics |date=2016 |publisher=Palgrave Macmillan UK |isbn=978-1-349-95121-5 |pages=1–5 |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_997-1 |access-date=19 October 2023 |language=en |chapter=Monetary Base|doi=10.1057/978-1-349-95121-5_997-1 }}</ref>

===Current monetary policy===
Starting in the early 1990s, a fundamental rethinking of monetary policy took place in major central banks, shifting to [[inflation targeting|targeting inflation]] rather than monetary growth and generally using interest rates to implement goals rather than quantitative measures like holding the quantity of base money at fixed levels.<ref name=Blanchard>Blanchard et al. 2017.</ref>{{rp|484–485}} As a result, modern central banks hardly ever conduct their policies by trying to control the money supply,<ref>Romer 2019, p. 608. Quote:''Because of these difficulties, modern central banks almost never conduct policy by trying to achieve some target growth rate for the money stock. Instead, their normal policies focus on adjusting the short-term nominal interest rate in response to various disturbances.''</ref> implying also that the monetary multiplier theory has become more irrelevant as a tool to understand current monetary policy.<ref name="RIP MM"/><ref name=Ihrig>{{cite journal |last1=Ihrig |first1=Jane |last2=Weinbach |first2=Gretchen |last3=Wolla |first3=Scott |title=How are Banks and the Fed Linked? Teaching Key Concepts Today |journal=Review of Political Economy |date=3 April 2023 |volume=35 |issue=2 |pages=555–571 |doi=10.1080/09538259.2022.2040906 |url=https://www.tandfonline.com/doi/full/10.1080/09538259.2022.2040906 |access-date=19 October 2023 |language=en |issn=0953-8259}}</ref>

[[Charles Goodhart]] notes in his chapter on the [[monetary base]] in ''The New Palgrave'' that the banking system has virtually never worked in the way hypothesized by the monetary multiplier theory. Instead, central banks have used their powers to effect a desired level of interest rates rather than achieve a pre-determined quantity of monetary base or of some monetary aggregate. He also mentions that the institutional development of the [[financial market]]s, notably [[interbank lending market]]s, implies that the monetary base multiplier no longer would, or could, work in the textbook fashion. Instead, he argues that the behavioural process leading to a change in monetary bases runs from an initial change in interest rates to a subsequent readjustment in monetary aggregate quantities, endogenously determining these as well as the accommodating monetary base.<ref name=Goodhart/> Also [[David Romer]] notes in his graduate textbook "''Advanced Macroeconomics''" that it is difficult for central banks to control broad monetary aggregates like M2, causing central banks generally to assign the behaviour of the money supply an unimportant role in policy, focusing instead on adjusting nominal interest rates to stabilize the economy.<ref>Romer 2019, pp. 607-608. Quote:''The measures of the money stock that the central bank can control tightly, such as [[high-powered money]], are not closely linked to [[aggregate demand]]. And the measures of the money stock that are sometimes closely linked with aggregate demand, such as ''M2'', are difficult for the central bank to control.''</ref> [[Greg Mankiw|Gregory Mankiw]], author of one of the widely read intermediate textbooks (''Macroeconomics'') that present the money multiplier theory, notes in its 11th edition that even though the Federal Reserve can influence the money supply, it cannot control it fully because households' decisions and banks' discretion in the conduct of their business may change the money supply in ways unanticipated by the central bank.<ref name="maninter"/>

After the [[2008 financial crisis]], several central banks, including the [[Federal Reserve]],<ref name="RIP MM"/> [[Bank of England]],<ref name="boe">{{Cite web|url=http://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy|title=Money creation in the modern economy|last1=McLeay|first1=Michael|last2=Radia|first2=Amar|date=14 March 2014|website=[[Bank of England]]|url-status=live|archive-url=https://web.archive.org/web/20191112182432/https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy|archive-date=2019-11-12|access-date=2019-11-14|last3=Thomas|first3=Ryland}}</ref> [[Deutsche Bundesbank]],<ref>{{Cite web|url=https://www.bundesbank.de/resource/blob/654284/df66c4444d065a7f519e2ab0c476df58/mL/2017-04-money-creation-process-data.pdf|title=The role of banks, non- banks and the central bank in the money creation process|website=[[Deutsche Bundesbank]]|series=Monthly Report April 2017/13|url-status=live|archive-url=https://web.archive.org/web/20190917181144/https://www.bundesbank.de/resource/blob/654284/df66c4444d065a7f519e2ab0c476df58/mL/2017-04-money-creation-process-data.pdf|archive-date=2019-09-17|access-date=2019-11-16}}</ref> the [[Hungarian National Bank]]<ref name=Abel>{{cite journal |last1=Ábel |first1=István |last2=Lehmann |first2=Kristóf |last3=Tapaszti |first3=Attila |title=The controversial treatment of money and banks in macroeconomics |journal=Financial and Economic Review |date=June 2016 |volume=15 |issue=2 |pages=33–58 |url=https://en-hitelintezetiszemle.mnb.hu/letoltes/istvan-abel-kristof-lehmann-attila-tapaszti-en.pdf |access-date=19 October 2023}}</ref> and [[Danmarks Nationalbank]]<ref>{{cite journal |title=Penge, kredit og bankvæsen |journal=Nationalbanken.dk |date=23 September 2014 |url=https://www.nationalbanken.dk/da/viden-og-nyheder/publikationer-og-taler/arkiv-publikationer/2014/penge-kredit-og-bankvaesen |access-date=19 October 2023 |language=da}}</ref> have issued explanations of money creation supporting the view that central banks generally do not control the creation of money, nor do they try to, though their interest rate-setting monetary policies naturally affect the amount of loans and deposits that commercial banks create. The Federal Reserve in 2021 launched several educational resources to facilitate teaching the conduct of current monetary policy, recommending teachers to avoid relying on the money multiplier concept, which was described as obsolete and unusable.<ref>{{cite web |title=Teaching the New Tools of Monetary Policy in an Ample-reserves Framework |url=https://www.stlouisfed.org/education/teaching-new-tools-of-monetary-policy |website=www.stlouisfed.org |access-date=19 October 2023 |language=en}}</ref><ref name=Ihrig/><ref>{{cite journal |last1=Ihrig |first1=Jane |last2=Wolla |first2=Scott |title=Teaching Monetary Policy with Ample Reserves |journal=Journal of Economics Teaching |date=2023 |pages=114–127 |doi=10.58311/jeconteach/6f8dff11179466b2d32da497c5465b9cff2774ac|doi-access=free }}</ref>

Jaromir Benes and [[Michael Kumhof]] of the IMF Research Department, argue that: the "deposit multiplier" of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending, turns the actual operation of the [[monetary transmission mechanism]] on its head. At all times, when banks ask for reserves, the central bank obliges. According to this model, reserves therefore impose no constraint and the deposit multiplier is therefore a myth. The authors therefore argue that private banks are almost fully in control of the money creation process.<ref>{{cite web
|url=http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf|title=The Chicago Plan Revisited|date=August 2012|author1=Jaromir Benes |author2=Michael Kumhof|website=IMF|access-date=19 July 2023}}</ref>

Besides the mainstream questioning of the usefulness of the money multiplier theory, the rejection of this theory has also been a theme in the [[Heterodox economics|heterodox]] [[post-Keynesian]] [[Schools of economic thought|school of economic thought]].<ref name=Ihrig/>