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Liquidity Risk, Credit Risk and the Money Multiplier

Author

Listed:
  • Tatiana Damjanovic
  • Vladislav Damjanovic
  • Charles Nolan
Abstract
Before the financial crisis there was a significant, negative relationship between the money multiplier and the risk free rate; post-crisis it was significant and positive. We develop a model where banksíreserves mitigate not only liquidity risk, but also default/credit risk. When default risk dominates, the model predicts a positive relationship between the risk free rate and the money multiplier. When liquidity risk dominates, that relationship is negative. We suggest reduced liquidity risk, from QE and remunerated reserves, helps explain the multiplier data. The model's implications linking the stock market and the money multiplier are also deduced and verified.

Suggested Citation

  • Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2017. "Liquidity Risk, Credit Risk and the Money Multiplier," Working Papers 2017_09, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2017_09
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    File URL: https://www.gla.ac.uk/media/media_538281_en.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    quidity risk; credit risk; excess reserves; US money multiplier; remuneration of reserves;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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