The money multiplier is a theory on the link between the quantity of base money (central bank reserves) to the quantity of broad money (bank deposits, currency) in the financial system. In this theory, the central bank adjusts the level of base money in the system, which gives commercial banks greater room under their reserve ratios to lend, which then increases the quantity of broad money. This sounds reasonable, but is inaccurate because commercial banks (and the banking system as a whole) are never constrained by reserves in their lending – they can always borrow more reserves, manage their liabilities differently, or evade regulations by moving their activity off-shore. In this post I’ll show why there is no such thing as a money multiplier.
