The Monetary Base And Bank Lending

894 WordsJun 22, 20164 Pages
The article by David Wheelock, “The Monetary Base and Bank Lending: You Can Lead a Horse to Water...”, discusses major issues with the monetary policy during a financial crisis. In the Fall of 2008, the Federal Reserve took action to dramatically increase the size of the monetary base, which doubled in size in under two years. Unfortunately, the money stock associated with the monetary base increased by a much smaller margin, and the ratio between the M1 money multiplier and the monetary base fell from 1.6 to 0.84 (Wheelock). Essentially, this means that the currency in circulation has skyrocketed, but the sum of that currency in the hands of the public and deposits made at depository institutions has increased minimally. This is due to a significant drop in in the lending behavior of banks, and a substantial increase in the amount of excess reserves held by banks. According to an article by Greg Mankiw (the author of our book), excess reserves shot up from around 2 billion to above 850 billion following the collapse of Lehman Brothers in 2009. Using what we have learned about markets and prices, it is clear that these significant changes can present catastrophic alterations to the economic state of a nation, and the activity of the U.S. banking system over recent years expresses this fear. An article, published two years after the article by David Wheelock by the Federal Reserve Bank of San Francisco, states that the Federal Reserve has more than tripled the monetary base
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