Working Paper #2010-05 – Money-Multiplier Shocks in a Credit-View Model

Department of Economics

University of Delaware

Working Paper #2010-05

Money-Multiplier Shocks in a Credit-View Model

Burton A. Abrams

ABSTRACT

The financial crisis and recession of 2008-2010 have witnessed the biggest reduction in money-supply multipliers in U.S. history. In contrast to what occurred during the Great Depression, the Fed has avoided decreases in monetary aggregates by dramatically increasing the monetary base. A variation of the Bernanke-Blinder credit-view model is shown to reveal that holding the money supply constant following an autonomous fall in the money multiplier is insufficient to prevent aggregate demand from falling. This helps to explain the severity of the 2008-2010 recession despite growing monetary aggregates and expansionary fiscal policy.

JEL Codes: F41, E51

Keywords: credit-view model, monetary policy, money-supply model