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Monetary base

The monetary base, also referred to as base money or high-powered money, comprises the total currency in circulation outside the central banking system plus the reserve balances deposited by commercial banks and other depository institutions at the central bank.^[1]^[2] This aggregate represents the most liquid portion of the money supply directly under central bank control, serving as the foundational component for broader monetary expansion through commercial bank lending under fractional reserve banking principles.^[1]^[3] Central banks manipulate the monetary base primarily through open market operations, discount lending, and adjustments to reserve requirements, with expansions often occurring during quantitative easing episodes to inject liquidity into the financial system amid economic downturns.^[4] In traditional theory, increases in the monetary base amplify the overall money supply via the money multiplier effect, where banks lend out a fraction of deposits, theoretically linking base growth to economic activity and price levels.^[3] However, empirical observations, particularly following the 2008 financial crisis and the 2020 pandemic response, reveal that substantial base expansions—such as those from Federal Reserve asset purchases—have not proportionally translated into broader money supply growth or immediate inflation due to elevated excess reserves held by banks and subdued lending dynamics.^[5] This disconnect underscores the monetary base's role as a policy lever whose transmission to the real economy depends on intermediary behaviors, interest rate environments, and public demand for currency, challenging simplistic causal narratives of inevitable inflationary spirals from base monetization.^[6]

Definition and Components

Currency in Circulation

Currency in circulation comprises the physical banknotes and coins issued by a central bank and held outside the depository institution system, serving as the most liquid, directly spendable element of the monetary base. This excludes vault cash maintained by banks for operational purposes, which is classified under reserves. In practice, it represents demand-driven money that households, businesses, and other non-bank entities use for transactions, savings, or as a store of value, with issuance adjusted by central banks to meet public demand rather than through active policy expansion.^[7]^[1] In the United States, currency in circulation includes Federal Reserve notes—predominantly $100 denominations—and minor coinage, totaling $853.6 billion as of December 2008. By December 2023, this figure had expanded to approximately $2.27 trillion, reflecting steady growth at an average annual rate of about 6-7% amid heightened demand for physical cash as a safe haven during financial uncertainties, including the 2008 crisis and subsequent low-interest-rate environment. This expansion stems from domestic hoarding behaviors, where individuals and firms increase cash holdings during economic stress for liquidity assurance, independent of credit creation through banking.^[8]^[9]^[10] A substantial portion of U.S. currency—estimated at 45% to over 60% of total notes in circulation—is held abroad, driven by dollarization in emerging economies where the dollar functions as an alternative to unstable local currencies. In countries like Argentina, Venezuela, and parts of Eastern Europe, residents accumulate dollars for transactions, remittances, and inflation hedging, with $100 bills comprising nearly 80% of overseas holdings due to their portability and anonymity. This international demand sustains growth in U.S. currency even as domestic cash usage declines with digital payments, underscoring its role as a global safe asset amid geopolitical and inflationary risks.^[11]^[12] Unlike bank reserves, which fluctuate sharply with central bank interventions, currency in circulation exhibits relative historical stability, growing predictably with population, income levels, and velocity preferences rather than monetary policy shocks. For instance, pre-2008 trends showed annual increases of 5-8%, persisting through quantitative easing periods where reserves ballooned but public cash demand remained anchored to transactional needs and precautionary motives. This stability highlights currency's endogenous nature, responsive to real economic behaviors over policy-induced expansions.^[8]^[2]

Bank Reserves

Bank reserves consist of balances that commercial banks maintain in accounts at the central bank, forming a non-public liability within the monetary base distinct from currency in circulation. These reserves primarily facilitate the settlement of interbank payments, where transfers between banks' reserve accounts at the central bank finalize obligations arising from customer transactions, check clearings, and securities trades, ensuring finality without reliance on private credit.^[13]^[14] They also act as liquidity buffers, allowing banks to absorb unexpected deposit outflows or payment demands without disrupting operations, thereby supporting financial stability through high liquidity and zero credit risk.^[13] Reserves are categorized into required reserves, historically mandated as a fixed percentage of eligible deposits to constrain credit expansion under fractional reserve banking, and excess reserves, voluntarily held beyond requirements for precautionary or opportunity-cost reasons. In the United States, required reserve ratios on net transaction accounts ranged from 0% to 10% depending on deposit levels until March 15, 2020, when the Federal Reserve Board reduced them to zero percent effective March 26, 2020, eliminating mandatory holdings amid ample liquidity from prior quantitative easing.^[15] This shift transformed all reserves into excess reserves, altering the base's composition by removing regulatory floors while reserves continued to underpin interbank settlements and voluntary liquidity management.^[15] Prior to the 2008 financial crisis, U.S. excess reserves remained minimal, averaging around $1.9 billion in August 2008, as banks minimized non-interest-bearing holdings to maximize lending or investments. Following the crisis, excess reserves surged to over $3 trillion by 2014, driven by the Federal Reserve's asset purchases that injected reserves into the system and the introduction of interest on reserves effective October 1, 2008, which raised the opportunity cost of deploying reserves into loans or securities.^[16]^[17] Mechanically, reserves enable fractional reserve lending by providing the settlement medium for deposit expansions, where banks can create loans up to the inverse of the reserve ratio in theory, but central bank control over total reserve supply—via open market operations or interest payments—prevents uncontrolled multiplier effects that could fuel inflation or instability.^[18] The post-2008 dynamics demonstrated that paying interest on reserves effectively caps the federal funds rate from below, incentivizing retention over expansionary lending without abolishing the reserve system's role in payment finality.^[17]

Relation to Broader Money Measures

The monetary base, also known as high-powered money or M0, constitutes the core liquidity provided by the central bank and underpins broader monetary aggregates such as M1 and M2 through the mechanism of deposit creation in fractional reserve banking. M1 typically includes currency in circulation plus highly liquid demand deposits and other checkable accounts, while excluding the reserves component of the base that banks hold non-circulating at the central bank; M2 extends M1 to incorporate less liquid assets like savings deposits and small time deposits.^[1] The base supplies the reserves against which commercial banks extend loans, generating new deposits that expand these aggregates beyond the initial base amount, with the extent of expansion determined by the money multiplier ratio (e.g., M2 divided by the base).^[19] In principle, the central bank exerts direct control over the exogenous monetary base via open market operations or reserve adjustments, whereas broader measures arise endogenously from private sector decisions, including banks' lending propensity and households' deposit preferences. The multiplier process operates as follows: a deposit backed by reserves allows the bank to lend excess amounts (beyond required reserves), creating secondary deposits in the borrower's account, which can then be redeposited and relent, iteratively amplifying the initial base injection into circulating deposits. However, this multiplier is not mechanically fixed at the inverse of reserve requirements (e.g., 10 under a 10% requirement), as it fluctuates with factors like excess reserve holdings, currency drain ratios, and credit demand.^[20] Empirical evidence from the United States illustrates the multiplier's instability: the M2-to-base ratio hovered around 9-10 prior to the 2008 financial crisis but collapsed to approximately 3-4 afterward, driven by a surge in excess reserves from central bank asset purchases that outpaced deposit growth.^[21] For instance, between December 2007 and January 2009, the monetary base doubled from $837 billion to $1.7 trillion while M2 rose more gradually, halving the effective multiplier; by 2023, persistent high reserves maintained the depressed ratio despite ample liquidity.^[21] This variability underscores that broader money growth does not reliably track base expansions, as banks may opt to hold reserves idly amid risk aversion or regulatory pressures rather than multiply them into loans.^[22] Consequently, the monetary base exhibits lower direct transactional velocity compared to M1 or M2, since reserves largely remain inert within the banking system and do not participate in everyday exchanges, limiting the base's immediate influence on economic activity relative to deposit-based aggregates.^[23] This distinction highlights the base's role as a foundational but constrained input, reliant on intermediary behaviors for propagation into wider money measures.

Historical Development

Origins Under Commodity Standards

Under commodity money systems predating the 20th century, the monetary base effectively consisted of specie—gold and silver coins—in circulation among the public and reserves of precious metals held in bank vaults, directly linking monetary expansion to the physical supply of metals rather than discretionary issuance. This arrangement imposed empirical constraints, as banks maintained fractional reserves of specie to redeem notes and deposits on demand, with convertibility enforced by arbitrage and the threat of outflows under the price-specie-flow mechanism.^[24]^[25] In the United States during the National Banking Era from 1863 to 1913, following the National Banking Acts of 1863 and 1864, national bank notes were backed by U.S. government bonds but redeemable in specie after the Specie Payment Resumption Act of January 14, 1875, restored gold convertibility at $20.67 per ounce. The base remained inelastic, unable to expand swiftly in response to seasonal or crisis-driven demand for currency, as note issuance required bond collateral and was capped by statutory limits, leading to recurrent liquidity strains during harvests or panics.^[26]^[27] The classical gold standard era from 1870 to 1914 exemplified the stability derived from this commodity-anchored base, with global gold production growing at an average annual rate of about 1-2%, yielding near-zero inflation averaging 0.08% to 1.1% across major economies, as monetary expansion was tethered to mining output rather than fiscal or policy discretion.^[28]^[25] Such rigidity manifested acutely in financial disruptions like the Panic of 1907, when reserve drains and note issuance limits exacerbated bank runs and credit contraction, highlighting the need for an elastic base; this crisis galvanized advocacy for central banking to modulate reserves dynamically, influencing the Federal Reserve Act of 1913.^[29]^[30]

Emergence with Central Banking

The Bank of England, founded in 1694 as a private corporation to finance the British government's war efforts against France, introduced early elements of managed monetary liabilities by lending £1.2 million to the Crown in exchange for the privilege of issuing banknotes backed initially by government debt rather than solely by specie.^[31] This fiduciary issuance represented a partial departure from commodity-tied money, allowing the Bank's notes to circulate as high-powered money while still constrained by gold reserves and parliamentary limits on uncovered notes.^[32] The Federal Reserve Act of December 23, 1913, established the United States' central bank, defining the monetary base as the sum of Federal Reserve notes outstanding and reserve balances held by depository institutions at the twelve regional Federal Reserve Banks.^[33] Unlike the prior national banking system, which relied on decentralized, gold-backed note issuance by commercial banks, the Fed centralized control over base money creation through open market operations and discount lending, enabling elastic adjustment of liabilities independent of immediate gold inflows.^[34] World War I suspensions of gold convertibility by major central banks shifted monetary systems from automatic specie arbitrage to discretionary base management, accelerating high-powered money growth amid fiscal strains.^[35] In Germany, the Reichsbank expanded the base by acquiring Treasury bills, with its holdings rising from 49% of outstanding bills in January 1922 to 79% by late 1923, fueling hyperinflation that peaked with prices doubling every few days and the U.S. dollar equaling over 4 trillion marks by November.^[36]^[37] Interwar U.S. policies similarly permitted base and credit expansion in the 1920s—Fed balances grew amid low discount rates—to support export-led growth, but this contributed to asset bubbles whose contraction preceded the 1929 downturn.^[38]^[39]

Evolution in Fiat Regimes

The suspension of the United States dollar's convertibility into gold on August 15, 1971—known as the Nixon Shock—marked the effective end of the Bretton Woods system and the transition to a pure fiat monetary regime, decoupling the monetary base from the fixed $35 per ounce gold parity that had constrained its expansion since 1944.^[40]^[41] Under the prior regime, the U.S. monetary base, comprising currency and reserves, was indirectly limited by gold reserves held against foreign dollar holdings; post-1971, central banks gained flexibility to adjust the base through open market operations without commodity backing, enabling potential for discretionary expansion to meet fiscal or stabilization needs but also risking inflationary pressures absent external anchors.^[42] This shift spread globally as other currencies, previously pegged to the dollar, abandoned fixed rates, with the international monetary system evolving toward floating exchanges backed solely by sovereign fiat authority.^[43] In the United States, the fiat regime's early decades highlighted the base's role in inflation dynamics, culminating in aggressive control efforts during Paul Volcker's chairmanship of the Federal Reserve from 1979 to 1987. Facing double-digit inflation peaking at 13.5% in 1980, Volcker shifted policy in October 1979 toward targeting nonborrowed reserves to restrain monetary aggregates, including the base, which facilitated short-term interest rate volatility but slowed overall money growth as federal funds rates rose above 20% in 1981.^[44]^[45] This approach contributed to recessions in 1980 and 1981-1982, after which inflation declined sharply to around 4% by 1983, with subsequent base growth stabilizing at moderate annual rates through the 1990s and 2000s under a framework emphasizing inflation targeting over rigid base control.^[46] The experience underscored fiat regimes' capacity for base restraint via interest rate tools, contrasting with the gold era's automatic limits, though it also revealed vulnerabilities to political pressures for expansion.^[47] Similar transitions unfolded in Europe, where fiat adoption amplified the monetary base's utility in defending semi-fixed exchange rates before full monetary union. The European Monetary System (EMS), established in 1979, relied on coordinated base adjustments and interventions to maintain currencies within narrow bands against the Deutsche Mark, but speculative pressures exposed limits during the 1992-1993 crisis, often termed Black Wednesday on September 16, 1992, when the British pound and Italian lira exited the Exchange Rate Mechanism (ERM) amid massive reserve drains.^[48] Central banks expanded bases temporarily through foreign exchange interventions—buying domestic currency with reserves—to prop up parities, yet divergent inflation and interest rate policies post-German reunification overwhelmed these efforts, leading to devaluations and wider bands.^[49] This paved the way for the euro's launch in 1999, under which the European Central Bank assumed unified control of the eurozone monetary base, detached from national fiscs and floating against other fiat currencies, reflecting a broader fiat evolution toward supranational base management for stability.^[50]

Measurement and Accounting

Domestic Calculation Methods

The monetary base, also known as high-powered money, is calculated domestically as the sum of currency in circulation and reserve balances held by depository institutions at the central bank, reflecting the central bank's direct monetary liabilities that serve as the foundation for broader money creation through fractional reserve banking.^[1] In the United States, this formula is implemented by the Federal Reserve as currency component—comprising Federal Reserve notes and coin held outside the U.S. Treasury, Federal Reserve Banks, and vaults of depository institutions—plus total reserves, which include both required reserves and excess reserves maintained in accounts at Federal Reserve Banks.^[7] This excludes items such as Treasury cash holdings and, notably, balances in the overnight reverse repurchase agreement (ON RRP) facility, which represent separate liabilities to non-depository counterparties and do not constitute reserve balances available for lending by banks.^[1]^[51] Domestic computations often incorporate adjustments to ensure accuracy and comparability, including seasonal factors applied to individual components before aggregation.^[7] For instance, the seasonally adjusted monetary base sums the separately adjusted figures for currency and total reserves, accounting for predictable fluctuations such as year-end liquidity demands or tax-related cash withdrawals, while non-seasonally adjusted series provide raw data without such smoothing.^[52] Float adjustments, historically relevant for reconciling clearing and collection delays in payment systems, have diminished in prominence with modern electronic processing but may still influence preliminary estimates in reserve calculations.^[53] Post-2020 developments, including the expansion of the ON RRP facility amid ample reserves, have highlighted shifts in liquidity management, where high uptake in reverse repos correlates with reduced bank reserves as funds shift from depository institutions to the facility, thereby contracting the measured base without altering the underlying formula.^[51] As of August 2025, the U.S. monetary base totaled $5,686.4 billion, with reserve balances comprising the dominant portion—exceeding currency in circulation by a factor of approximately 1.5—underscoring the post-2008 regime of abundant reserves driven by quantitative easing and regulatory changes.^[54] This reserve-heavy composition, verifiable through the Federal Reserve's H.6 release and Federal Reserve Economic Data (FRED) series BOGMBASE, emphasizes the base's role as an accounting identity tracking central bank balance sheet expansion rather than direct control over money multipliers in contemporary policy frameworks.^[7]^[54]

International Variations and Data Sources

The monetary base, while conceptually similar across jurisdictions as the sum of currency in circulation and central bank liabilities to depository institutions, exhibits definitional variations in component inclusions and measurement methodologies. The European Central Bank's (ECB) M0, or monetary base, comprises euro banknotes and coins issued by the Eurosystem and held outside it, plus credit institutions' reserve holdings including sight, fixed-term, and minimum reserve deposits with the Eurosystem.^[55] In contrast, the U.S. Federal Reserve's monetary base includes Federal Reserve notes and coins in circulation plus total reserve balances (required and excess) held by depository institutions at Federal Reserve Banks, excluding U.S. Treasury currency and certain minor items like Federal Reserve float.^[54] These differences arise from institutional structures, such as the Eurosystem's multi-national framework influencing reserve classifications. The People's Bank of China (PBOC) defines base money as currency in circulation (M0) plus reserve deposits (required, excess, and other) of financial institutions with the PBOC. Unlike the Federal Reserve, which maintains a base focused solely on domestic currency and reserves without direct forex integration, PBOC base dynamics incorporate foreign exchange reserve accumulation through unsterilized interventions, where dollar purchases expand RMB liabilities, effectively linking base growth to China's $3.2 trillion forex reserves as of mid-2023. This reflects China's managed exchange rate regime, leading to base expansions tied to trade surpluses, in contrast to the Fed's more insulated approach post-gold standard abandonment. The Bank of Japan (BOJ) monetary base includes Japanese banknotes and coins in circulation plus current account balances held by financial institutions at the BOJ. Post-Abenomics initiation in 2013, aggressive quantitative easing drove the base from around 140 trillion yen in early 2013 to over 600 trillion yen by 2020, representing roughly 120% of GDP and underscoring methodological consistency in reserve inclusions amid massive asset purchases. Empirical contrasts appear in nations with high gold reserves, such as Germany (over 3,300 tonnes held by Bundesbank), where base definitions align with ECB standards but historical gold-backing under Bretton Woods imposed stricter constraints via convertibility rules, limiting fiat-like expansions seen in Japan. Primary data sources for international comparisons include the Federal Reserve Economic Data (FRED) for U.S. series, offering weekly and monthly updates on base totals.^[54] The ECB Statistical Data Warehouse provides granular Eurozone data, including breakdowns by country and maturity. For cross-country aggregates, the Bank for International Settlements (BIS) compiles comparable monetary statistics, facilitating analyses of base growth rates and reserve compositions across over 80 jurisdictions. These repositories enable empirical tracking, though harmonization challenges persist due to definitional divergences.

Theoretical Perspectives

Quantity Theory and Base Control

The quantity theory of money posits that changes in the monetary base, when multiplied by its velocity of circulation (V), determine nominal income, expressed as base money (M_b) times V equals the price level (P) times real output (Y): M_b V = P Y.^[56] This framework implies that central banks can exert control over nominal GDP by exogenously managing the base through steady, predictable growth, assuming relative stability in V and Y's real growth. Proponents argue that base exogeneity—stemming from central bank operations like open market purchases—allows for causal influence on prices and output in the long run, with deviations attributable to temporary velocity fluctuations rather than inherent instability in the theory itself.^[57] Milton Friedman, a key advocate, emphasized applying this to a rule-based policy of constant base or money supply growth, calibrated to long-term economic expansion, such as 3-5% annually in the postwar U.S. context to accommodate productivity gains while minimizing inflation volatility.^[58] He contended that discretionary adjustments disrupt predictability, whereas steady base expansion aligns with the theory's prediction of proportional nominal income effects, supported by historical evidence of money growth driving inflation over decades.^[59] Empirically, U.S. data from 1959 to 2024 show the adjusted monetary base growing at an average annual rate of approximately 7.4%, correlating with nominal GDP expansion, though inflation averaged around 3.7%, with the differential reflecting real output growth of about 3%.^[54]^[60] Long-run cross-country studies confirm a near one-for-one relationship between sustained base or money growth and inflation, validating the theory's core proportionality when averaged over cycles.^[56] However, short-run tests reveal breakdowns, as base growth does not always translate predictably to prices due to velocity shifts. A primary critique within the framework highlights velocity's instability, particularly post-2008, when the U.S. base expanded over 20-fold amid quantitative easing, yet inflation remained subdued as banks hoarded excess reserves, driving velocity to historic lows and severing the expected transmission.^[61] This endogenously lowers effective money circulation, challenging base control's reliability for fine-tuned outcomes, though long-run neutrality holds as trapped liquidity eventually pressures prices upon release.^[62]

Money Multiplier Framework

The money multiplier framework models the expansion of broader money measures, such as M2, as a function of the monetary base through iterative lending in fractional reserve banking. Under this exogenous money view, an increase in the base—via central bank open market purchases or reserve injections—triggers banks to lend excess reserves, creating new deposits that become further lendable, yielding a multiplied money supply. The core formula simplifies to M = m \times B, where M is the money supply, B is the monetary base, and the multiplier m \approx 1 / rr with rr denoting the required reserve ratio (typically 10% historically, implying m = 10).^[23] This assumes fixed behavioral parameters: banks lend all non-required reserves, households maintain a stable currency-to-deposit ratio, and no excess reserves accumulate, ensuring m stability for policy predictability.^[63] In practice, the framework's stability hinges on these assumptions holding, but empirical data expose its fragility, as m fluctuates with economic conditions, banking behavior, and policy shifts rather than remaining mechanically tied to rr. Pre-2008, the U.S. M2 multiplier hovered around 8-9, reflecting moderate excess reserve holdings and active lending cycles that amplified base growth into deposit expansion.^[64] Post-financial crisis, Federal Reserve quantitative easing from 2008 onward injected trillions in reserves, prompting banks to retain vast excess balances amid low loan demand and risk aversion; this drove the effective multiplier below 3 for M2 by 2010-2012 and near 1 for M1, as unused reserves swelled without corresponding deposit multiplication.^[21]^[20] Excess reserves effectively inflate the reserve base denominator, compressing m far below textbook predictions and debunking narratives of reliable, automatic expansion from base targeting alone—evident in the 2008-2014 period when base tripling yielded only modest M2 growth.^[22] While the model implies unidirectional causation from base to lending, real-world dynamics often reverse this, with loan demand prompting banks to seek reserves post-facto via interbank markets; yet the base retains causal realism as an upper bound, constraining total reservable liabilities to B / rr under fractional rules, beyond which perpetual excess holdings would be needed to sustain further deposits.^[65] This ceiling underscores the framework's theoretical limit, even amid behavioral endogeneity, as verified reserve accounting prevents unbounded multiplication without base accommodation.^[23]

Endogenous Money Critiques

Post-Keynesian theorists argue that the monetary base does not exogenously determine credit creation or broader money supply, but rather accommodates bank lending decisions, with central banks supplying reserves reactively to maintain the target interest rate.^[66] In this framework, commercial banks initiate loans based on borrower demand, creating deposits endogenously, which in turn necessitate reserve adjustments by the central bank, implying a horizontal reserve supply curve at the prevailing policy rate rather than a vertical exogenous supply.^[67] Empirical support includes Granger-causality tests showing loans preceding deposits and reserves, as banks extend credit independently of initial reserve holdings. Studies across G-7 economies from the late 20th century confirm this sequence, with bank loans driving changes in money supply rather than reserves constraining lending, challenging the traditional money multiplier model's assumption of base-driven expansion.^[68] For the UK, Bank of England analysis of banking operations indicates that loan creation typically precedes deposit inflows and reserve demands, with the central bank accommodating these through open market operations or discount window lending, particularly evident in data spanning the 1980s to 2000s when reserve requirements were low and interest rate targeting dominated.^[67] Critics of the vertical base supply assumption highlight that predictive failures of multiplier models during periods of stable rates underscore the demand-driven nature of reserve usage.^[69] However, proponents of base control counter that endogeneity holds primarily in short-run, interest-rate-targeted regimes with ample reserves, but the base anchors long-run money supply constraints, as excessive central bank accommodation can fuel unsustainable credit growth.^[70] Historical hyperinflations, such as in Weimar Germany (1921–1923) where Reichsbank base expansion via deficit monetization preceded rapid credit proliferation and price spirals exceeding 300% monthly, illustrate cases where base surges initiated rather than followed credit booms, eroding the accommodation mechanism as confidence collapsed. Similar patterns in Zimbabwe (2000s), with base money multiplying over 10,000% annually before credit velocity accelerated, suggest that while short-term reactivity prevails under normal conditions, unconstrained base growth can reverse causality in extreme fiscal-monetary breakdowns.^[71]

Role in Monetary Policy

Conventional Tools for Base Adjustment

The primary conventional tool for adjusting the monetary base is open market operations (OMOs), conducted by the Federal Reserve Bank of New York's trading desk, which involve buying or selling U.S. government securities, primarily Treasury securities, in the secondary market.^[72] Purchases of securities inject reserves into the banking system by crediting the accounts of counterparties—typically primary dealers—at Federal Reserve Banks, thereby expanding the monetary base, which comprises currency in circulation plus total reserves.^[72] Sales of securities have the opposite effect, draining reserves and contracting the base.^[72] These operations occur nearly daily, often as temporary transactions like repurchase agreements (repos) for purchases or reverse repos for sales, to fine-tune reserve availability and align the federal funds rate with the Federal Open Market Committee's (FOMC) target range.^[73] The discount rate, set by the Federal Reserve Board of Governors as the interest charged on short-term loans extended to depository institutions through the discount window, provides another mechanism for base adjustment by influencing banks' incentives to borrow reserves directly from the central bank.^[74] When banks borrow from the discount window, the Federal Reserve credits their reserve accounts, increasing the monetary base; conversely, discouraging such borrowing through higher rates limits base expansion via this channel.^[75] Adjustments to the discount rate—typically aligned above the federal funds target—help establish an upper bound (ceiling) in the policy interest rate corridor, signaling monetary stance and affecting overall reserve demand without requiring large-scale OMOs.^[76] Reserve requirement ratios, which mandate the fraction of certain deposits that banks must hold as reserves either in vault cash or at Federal Reserve Banks, serve as an occasional fine-tuning lever by altering the demand for base money relative to deposit levels.^[15] Lowering these ratios reduces required reserves, allowing the existing base to support greater lending and deposit expansion for a given base level, while increases heighten reserve needs and may necessitate compensatory OMOs to avoid liquidity strains.^[77] Such changes are rare due to their broad impact on the banking system and are often offset by OMOs to stabilize reserves.^[77] Since October 2008, interest on reserve balances (IOR)—paid by the Federal Reserve on both required and excess reserves—has enabled more flexible base management by establishing a lower bound (floor) in the interest rate corridor, reducing the need for precise quantity targeting.^[17] With IOR, banks are incentivized to hold excess reserves rather than lend them at lower market rates, allowing the monetary base to expand elastically to accommodate fluctuations in reserve demand while keeping short-term rates, such as the federal funds rate, near the IOR level within the corridor defined by IOR below and the discount rate above.^[78] This framework permits the Fed to conduct OMOs for rate control rather than rigid base pegging, adapting to varying banking system liquidity needs.^[78]

Unconventional Measures like Quantitative Easing

Quantitative easing (QE) involves central banks conducting large-scale purchases of financial assets, primarily government securities and mortgage-backed securities, to expand the monetary base beyond what conventional interest rate adjustments can achieve. In the United States, the Federal Reserve initiated QE1 in November 2008, purchasing up to $1.75 trillion in agency debt and mortgage-backed securities by March 2010; this was followed by QE2 in November 2010 with $600 billion in Treasury securities, and QE3 from September 2012 to October 2014, involving open-ended purchases that cumulatively expanded the Fed's balance sheet from approximately $882 billion in 2007 to $4.473 trillion by 2017.^[79]^[80]^[81] Mechanically, when the central bank executes QE, it credits the reserve accounts of commercial banks or other sellers with newly created central bank reserves in exchange for the debited assets, directly increasing the monetary base's reserve component without requiring banks to lend out those reserves immediately. This process swelled the U.S. monetary base from about $850 billion in mid-2008 to over $4 trillion by late 2014, tripling its size amid the post-financial crisis environment.^[82]^[54] The absence of proportional consumer price inflation during this expansion stemmed from banks hoarding excess reserves, facilitated by the Federal Reserve's introduction of interest payments on reserves in October 2008, which incentivized retention over lending.^[83] Similar unconventional measures were employed by the European Central Bank (ECB), notably through long-term refinancing operations (LTROs) in late 2011 and early 2012, which provided eurozone banks with over €1 trillion in low-interest, three-year loans against collateral, thereby injecting reserves and expanding the eurozone monetary base.^[84] These operations mirrored QE by bypassing the zero lower bound on interest rates—where policy rates approach zero and further cuts become ineffective—aiming to lower long-term yields and support lending, though they also heightened risks of moral hazard by encouraging riskier asset holdings among banks.^[85]^[86]

Empirical Challenges to Policy Effectiveness

Monetary policy transmission through adjustments to the monetary base faces significant empirical challenges due to long and variable lags, often estimated at 12 to 18 months for effects on output and prices in advanced economies.^[87] These lags, first highlighted by Milton Friedman as "long and variable," complicate central banks' ability to fine-tune economic conditions, as policy actions may impact the economy well after initial implementation.^[88] Historical evidence underscores mistiming risks; during the early 1930s, the Federal Reserve permitted a contraction in the monetary base amid banking panics, which Friedman and Schwartz argued amplified the Great Depression's severity by failing to offset declines in money supply and deposits.^[89] ^[90] Leakages further undermine base control efficacy, as expansions do not reliably translate into broader money supply or lending due to banks' risk aversion and regulatory incentives to hold idle reserves. Following the 2020 expansion, U.S. bank reserves exceeded $3 trillion by mid-decade, with much remaining unlent despite zero reserve requirements, reflecting a shift to an "ample reserves" regime where banks prioritize liquidity buffers over credit extension amid uncertainty.^[91] ^[92] Empirical models indicate that risk-averse banks accumulate substantial excess reserves in response to loan risk shocks, trapping base growth without stimulating activity.^[93] International capital flows exacerbate this, diverting base liquidity offshore rather than into domestic lending channels. Declines in money velocity have empirically offset base expansions, weakening the link between central bank actions and inflationary pressures. Post-2008 and post-2020, U.S. M2 velocity fell to historic lows, muting the impact of massive base injections on nominal spending despite theoretical predictions of proportionality.^[94] ^[95] This instability arises from shifts in liquidity preference and uncertainty, as modeled in analyses spanning financial crises, where velocity drops counteract money supply growth and challenge monetarist control assumptions.^[96] Recent quantitative tightening illustrates reverse causality debates, with U.S. monetary base contraction via balance sheet runoff from 2023 onward coinciding with disinflation, yet without clear evidence that base reduction directly caused price stabilization. Reserves declined by over $300 billion in late 2024 alone, yet inflation eased independently of this shrinkage, suggesting policy responses lag underlying dynamics rather than drive them.^[91] ^[97] Globally, similar patterns emerged, with base growth slowing amid falling inflation rates from 2022 peaks, prompting questions on whether observed correlations reflect policy efficacy or endogenous adjustments to demand and supply shocks.^[98]

Empirical Relationships

Base Expansion and Inflation Correlation

Empirical evidence from historical episodes demonstrates a strong long-run correlation between expansions of the monetary base and inflation rates. In cases of hyperinflation, such as Weimar Germany in 1923, the money supply, driven by central bank issuance, increased dramatically, with the Reichsmark depreciating from 133 billion to 2.5 trillion per U.S. dollar within weeks, leading to price levels rising by factors exceeding 10^9 amid base money multiplication by over 1,000 times.^[99] Similarly, Zimbabwe's hyperinflation in the 2000s resulted from rapid growth in central bank reserve money, peaking at annual inflation rates of 89.7 sextillion percent in November 2008, directly tied to unchecked monetary expansion.^[100] These extremes illustrate the causal primacy of base money growth in eroding purchasing power when sustained without offsetting contractions. In modern economies, long-run data reinforces this relationship, though short-term deviations occur. For the United States since 1971, the monetary base has grown at a compound annual rate of approximately 7%, outpacing average CPI inflation of around 4%, consistent with quantity theory predictions over extended periods.^[54] Cross-country studies confirm that long-run averages of base money growth closely track inflation, with deviations explained by temporary factors rather than breaks in the underlying mechanism.^[101] Recent expansions highlight how short-term disconnects, often misinterpreted as decoupling, are transient. Following the 2020 crisis, the U.S. monetary base surged by over $3 trillion from early 2020 levels of about $3.2 trillion to peaks exceeding $6 trillion by mid-2021, driven by Federal Reserve asset purchases.^[54] Initial CPI mutedness, with inflation rising modestly to 1.2-2% through mid-2021, stemmed from a collapse in M2 velocity—from roughly 1.4 in Q1 2020 to below 1.1 by 2022—reflecting hoarding in reserves and reduced circulation amid lockdowns and uncertainty.^[102] However, as velocity stabilized and base growth persisted, inflation accelerated to 9.1% by June 2022, underscoring that sustained base expansion predictably undermines purchasing power once absorption capacities are saturated, with supply shocks amplifying but not originating the dynamic.^[103]

Interactions with Money Velocity and Output

The monetary base influences real output indirectly through its expansion of credit creation capacity, which interacts with the velocity of money circulation to determine the pace of economic transactions supporting GDP. In the quantity theory framework adapted to the base, nominal GDP approximates base times multiplier times velocity, where velocity captures the frequency of money usage in production and exchange; empirical studies indicate that base growth typically exhibits a positive short-run correlation with output when velocity remains stable, but divergences arise when velocity adjusts endogenously to excess reserves or demand shifts.^[96] Regressions incorporating velocity interactions, such as vector autoregressions on historical U.S. data from 1929 onward, reveal that base expansions boost output primarily via heightened liquidity demand during stable periods, though financial frictions can weaken this transmission.^[104] During the U.S. economic expansions of the 1960s, annual monetary base growth averaged approximately 5-7% from 1960 to 1969, aligning closely with real GDP growth of around 4.4% per year, as active banking intermediation and steady velocity supported credit-fueled investment without significant hoarding.^[54] This period's positive base-output elasticity, evident in contemporaneous correlations exceeding 0.7 in quarterly data, stemmed from productive allocation of reserves into private sector lending, enhancing capital formation.^[105] In contrast, the 1970s stagflation era saw base growth accelerate to over 10% annually amid oil shocks and fiscal deficits, yet real output stagnated with GDP growth dipping below 2% yearly from 1973-1975; crowding-out effects from government borrowing absorbed credit resources, diminishing private investment efficiency and illustrating how over-expansion can disrupt velocity-output linkages.^[106]^[107] Post-2008, the Federal Reserve's monetary base surged from $824 billion in January 2008 to $3.8 trillion by June 2014, a more than fourfold increase, but this was substantially offset by a sharp decline in money velocity, with M2 velocity dropping from 1.72 in Q4 2007 to 1.37 by Q4 2009, constraining the net expansion of transactional demand and limiting real GDP recovery to an average 2.2% annual growth through 2019.^[54]^[102] Hoarding of excess reserves by banks, reaching $2.7 trillion by 2014, reflected heightened liquidity preference amid regulatory tightening and uncertainty, reducing the base's multiplier effect and velocity's role in amplifying output; regressions on this period show velocity declines explaining up to 60% of the muted GDP response to base injections.^[94] Preceding the crisis, sustained base accommodation via low rates from 2001-2007 fueled credit misallocation toward housing, inflating a bubble that comprised 6% of GDP by 2006 and later precipitated output contraction, underscoring risks of base-driven distortions in sectoral velocities.^[108] Historical base velocity exhibited remarkable stability from 1919 to 1999, averaging around 20-25 times GDP turnover, but post-2000 deviations highlight how endogenous velocity adjustments mediate base impacts on sustainable output growth.^[109]

Controversies and Debates

Monetarist vs. Demand-Driven Views

Monetarists, led by Milton Friedman, argue that discretionary adjustments to the monetary base exacerbate economic instability, advocating instead for a fixed rule of steady base growth—typically 3-5% annually—to match long-term real output expansion and prevent inflationary spirals or deflationary traps.^[58] This approach posits that unpredictable base expansions fuel nominal rigidities and business cycles, as evidenced by the U.S. Great Depression, where base contraction amplified output collapse by over 30% from 1929 to 1933.^[110] Empirical support includes the Federal Reserve's 1979-1982 experiment under Paul Volcker, which targeted non-borrowed reserves and M1 growth, reducing inflation from 13.5% in 1980 to 3.2% by 1983 without inducing a prolonged recession beyond initial lags.^[110] In contrast, demand-driven views, rooted in Keynesian frameworks, treat the monetary base as largely endogenous, passively adjusting to output gaps and liquidity preferences rather than dictating them.^[111] Policymakers are urged to expand the base during downturns to close negative output gaps, with central banks like the Fed responding to real activity indicators via interest rate corridors that accommodate credit demand.^[112] However, critiques highlight long implementation lags—often 12-18 months—and systematic over-accommodation, as low real rates below Taylor-rule prescriptions from 2002-2005 correlated with a 50%+ rise in U.S. housing prices, inflating a bubble that burst in 2008.^[113] Empirical analysis reveals a hybrid dynamic: the base remains exogenous in the long run under central bank control, anchoring nominal anchors like inflation expectations, yet exhibits high short-run elasticity to demand shocks, where velocity fluctuations amplify policy errors.^[70] Data from post-1971 fiat regimes show that rule-based base targeting outperforms discretion in stabilizing velocity around 1.5-2.0 long-term averages, whereas activist expansions—such as the Fed's 2001-2004 rate cuts—deviated base growth by 2-3 percentage points above trend, correlating with subsequent asset mispricings exceeding 20% GDP equivalents.^[113] This favors mechanical rules over judgmental activism, as discretionary responses often embed forecast biases from institutions prone to underestimating inflationary persistence.^[114]

Austrian Critiques of Central Control

Austrian economists contend that central banks' monopoly control over the monetary base facilitates artificial expansions of bank reserves, which suppress interest rates below levels reflecting genuine savings and time preferences, thereby initiating unsustainable economic booms.^[115] This distortion, central to the Austrian Business Cycle Theory (ABCT) developed by Ludwig von Mises in the 1920s and refined by Friedrich Hayek in works such as Prices and Production (1931), misleads entrepreneurs into overinvesting in higher-order capital goods—such as long-term projects mismatched with consumer demand—under the illusion of abundant savings signaled by cheap credit.^[116]^[117] The resulting cluster of malinvestments inflates asset prices and production in unsustainable sectors during the boom phase, only for the inevitable correction to manifest as a bust when credit contraction reveals the resource shortages and errors in capital allocation.^[115] The elastic nature of the fiat monetary base under central authority exacerbates these cycles by enabling fractional reserve banks to multiply reserves into excessive credit without the disciplining mechanism of full convertibility into a fixed commodity like gold.^[116] Hayek argued in the 1930s that such interventions interfere with the market's intertemporal coordination, where natural interest rates equilibrate saving and investment; instead, central-induced expansions create a "forced saving" illusion, diverting resources from consumer goods to capital-intensive pursuits that cannot be sustained without ongoing monetary injections.^[117] This process inherently generates moral hazard, as banks and investors anticipate bailouts from the lender-of-last-resort function, further inflating leverage and risk-taking.^[118] Empirically, Austrians point to the 2008 global financial crisis as a textbook case, where the U.S. Federal Reserve's expansionary policies—lowering the federal funds rate to 1% by June 2003 and injecting liquidity post-2001 recession—fueled a credit boom in housing and derivatives, with the monetary base growing from about $800 billion in 2000 to over $1.7 trillion by 2008 amid fractional reserve multiplication.^[118] Economists like Peter Schiff anticipated the downturn in 2006-2007, attributing it to Fed-induced distortions rather than mere market failures, as malinvestments in real estate collapsed when rates normalized and credit tightened.^[119] In contrast to centrally managed systems, historical episodes of competitive private note issuance, such as Scotland's free banking era from 1716 to 1845, demonstrated greater stability through market-enforced reserve constraints and redemption pressures, avoiding the amplified errors of elastic base control.^[120] To mitigate these recurrent distortions, Austrian theorists advocate abolishing central banks in favor of free banking regimes, where private institutions issue notes backed by competitive assets and face full liability for overexpansion, or reinstating a gold standard to anchor the base to mining output—limiting growth to roughly 1-2% annually historically and eliminating discretionary manipulation.^[121]^[120] Such alternatives, proponents argue, restore sound money by aligning incentives with real savings and ending the privilege of fractional reserves subsidized by central guarantees, thereby preventing the boom-bust pathology inherent in fiat base control.^[116]

Risks of Monetary Financing and Hyperinflation

Monetary financing occurs when a central bank directly purchases government debt or expands the monetary base to fund fiscal deficits, bypassing market mechanisms for debt issuance. This approach, advocated in elements of Modern Monetary Theory (MMT) as a tool for achieving full employment without immediate fiscal constraints, carries inherent risks of eroding central bank independence and fostering self-reinforcing inflation expectations, as agents anticipate ongoing base expansion to service rising nominal spending demands.^[122]^[123] Historical precedents demonstrate that such financing often initiates a feedback loop where initial base growth signals fiscal indiscipline, prompting wage and price adjustments that amplify inflationary pressures beyond initial money supply increases. In the Weimar Republic, reparations obligations and fiscal deficits led to massive monetary base expansion through Reichsbank note issuance starting in 1921, with the base surging over 10,000% by 1923, directly preceding hyperinflation that peaked at monthly rates exceeding 29,500% in November 1923.^[124]^[99] Similarly, in Venezuela during the 2000s and 2010s, central bank monetization of government deficits caused the monetary base to expand exponentially—reaching annual growth rates above 100% by 2014—triggering hyperinflation that hit 1,000,000% annualized by 2018, as base surges outpaced output and velocity spiked amid eroding currency confidence.^[125]^[126] These cases illustrate how base monetization precedes velocity accelerations, not merely correlates with them, as fiscal needs compel further printing to cover inflated costs. Post-World War II experiences in several economies, including the United States, involved temporary inflation suppression through price controls and bond pegs despite monetary base expansions of up to 149% during wartime financing; however, removal of controls in 1946 unleashed pent-up inflationary forces, with U.S. CPI rising 18% that year, underscoring that base growth effects are deferred but not neutralized by administrative measures.^[127]^[128] Empirically, sustained monetary base growth exceeding 10% annually has correlated with accelerating inflation across global episodes, with no evident safe threshold, as documented in analyses of high-inflation periods where money growth outstrips real output by similar margins, leading to persistent price level instability.^[129]^[130] Such patterns affirm that normalized deficit monetization undermines long-term price stability by embedding expectations of debasement.

Recent Developments

Post-2008 Global Financial Crisis Expansions

Following the 2008 global financial crisis, central banks implemented quantitative easing (QE) programs that dramatically expanded the monetary base to inject liquidity and stabilize financial systems. In the United States, the Federal Reserve's monetary base, measured as the sum of currency in circulation and reserve balances, rose from approximately $825 billion in August 2008 to $2.8 trillion by June 2012, more than tripling in scale through asset purchases under QE1 (November 2008 to March 2010) and QE2 (November 2010 to June 2011).^[54] ^[131] Similar expansions occurred globally; the European Central Bank's balance sheet, proxying base growth via longer-term refinancing operations (LTROs) starting in 2008 and intensified in 2011-2012, increased from about €1.2 trillion in late 2008 to over €3 trillion by early 2012, averting sovereign debt contagion in the eurozone periphery.^[132] The Bank of Japan, already pursuing zero interest rate policy, modestly expanded its monetary base from ¥90 trillion in 2008 to around ¥120 trillion by 2012, supplementing earlier unconventional measures with further asset purchases to counter deflationary pressures.^[133] ^[134] These base surges were contained from broad inflationary spillover primarily due to structural factors, including the introduction of interest on reserves (IOR) by the Federal Reserve in October 2008, which paid banks to hold excess reserves rather than lend them out, effectively trapping liquidity within the banking system.^[135] ^[136] A sharp decline in money velocity—falling from 1.8 in 2008 to below 1.5 by 2012 in the U.S.—further decoupled base growth from nominal spending, as households and firms deleveraged amid uncertainty.^[137] ECB and BOJ policies similarly relied on ample reserve provision without full transmission to credit creation, with European banks hoarding LTRO funds and Japanese institutions maintaining high excess reserves. In the short term, QE contributed to GDP stabilization by restoring market confidence and preventing a deeper credit crunch; U.S. real GDP contracted 4.3% in 2009 but rebounded with 2.5% growth by 2010, correlating with base expansion timing.^[138] However, prolonged low rates fostered long-run distortions, including asset price inflation—U.S. equity indices rose over 80% from 2009 lows—and the proliferation of "zombie firms" sustained by cheap credit, which crowded out productive investment and correlated negatively with subsequent GDP growth in affected economies like Japan and the eurozone.^[139] ^[140] Empirical studies attribute this zombification to extended ultra-easy policy, where non-viable firms survived at the expense of healthier competitors, amplifying inefficiencies without proportional broad-based recovery.^[141]

COVID-19 Policy Responses

In March 2020, as the COVID-19 pandemic triggered financial market turmoil and economic shutdowns, the Federal Reserve initiated aggressive monetary easing, expanding the U.S. monetary base from $3.35 trillion at the end of December 2019 to $5.16 trillion by December 2020, a 54% increase driven primarily by open market purchases of Treasury securities and mortgage-backed securities totaling over $2.7 trillion.^[54] This expansion reflected the Fed's shift to unlimited quantitative easing announced on March 23, 2020, alongside interest rate cuts to near zero, to stabilize credit markets and support lending. The policy response involved close fiscal-monetary coordination, exemplified by the CARES Act signed on March 27, 2020, which authorized $2.2 trillion in stimulus including direct payments and enhanced unemployment benefits, much of which was financed through Treasury issuance that the Fed subsequently purchased, channeling funds into bank reserves rather than broad money circulation initially.^[142] These reserves accumulated as excess holdings at the Fed due to the prevailing ample reserves framework and banks' precautionary liquidity hoarding amid uncertainty, limiting immediate transmission to broader money supply measures like M2, which grew by about 25% in 2020.^[7] Globally, the Federal Reserve coordinated with other central banks by reactivating and expanding U.S. dollar liquidity swap lines to 14 counterparts, including major institutions like the European Central Bank and Bank of Japan, providing up to $450 billion in temporary dollar funding to mitigate offshore dollar shortages and prevent a broader liquidity crisis.^[143] These facilities, peaking in usage during March-April 2020, helped stabilize cross-border funding markets strained by the "dash for cash."^[144] Despite the unprecedented base expansion outpacing M2 growth in relative terms, consumer price inflation remained subdued at 1.2% for 2020, attributed to collapsed demand, anchored inflation expectations, and the absorption of liquidity into reserves without proportional velocity increase. However, from 2021 onward, a partial rebound in money velocity—rising from pandemic lows around 1.1 to approximately 1.2 for M2—combined with lingering fiscal stimulus, energy price surges, and supply chain disruptions, propelled CPI inflation to a peak of 9.1% year-over-year in June 2022.^[102] This sequence underscored the delayed effects of base injections when interacting with recovering transaction demand and external shocks.

2023-2025 Contractions and Emerging Trends

From 2023 through mid-2025, major central banks implemented quantitative tightening (QT) to reduce balance sheet sizes accumulated during prior expansions, leading to contractions or stabilization in the monetary base. In the United States, the Federal Reserve's monetary base stood at approximately $5.67 trillion in August 2025, reflecting relative stability after peaking near $6 trillion in 2022, as QT allowed up to $60 billion monthly in Treasury securities and $35 billion in agency mortgage-backed securities to roll off without reinvestment.^[7] Globally, the aggregate monetary base declined by about 0.7% in September 2024 compared to the prior year, with a cumulative reduction of $520 billion over the preceding twelve months across major economies.^[145] These reductions occurred alongside policy rate hikes, which elevated the opportunity cost of lending and encouraged banks to retain excess reserves, thereby trapping liquidity within the banking system despite shrinking central bank liabilities.^[146] Emerging trends point to technological shifts that could redefine the composition of the monetary base. The Bank for International Settlements (BIS) highlighted in its 2025 annual report the potential for tokenization of central bank money, including pilots for tokenized reserves and wholesale central bank digital currencies (CBDCs), which may integrate digital representations of base money into settlement systems and expand its scope beyond physical currency and traditional deposits.^[147] Over 90% of central banks explored CBDCs by 2024, with ongoing pilots in jurisdictions like the European Union and Singapore testing interoperability with tokenized assets, potentially enabling programmable reserves that challenge conventional base metrics.^[148] Concurrently, geopolitical tensions, including trade disruptions and sanctions since 2023, have introduced volatility to base management, as central banks navigate reserve diversification amid dollar hegemony strains.^[147] Cryptocurrencies have empirically acted as a shadow parallel to the fiat base, with Bitcoin's institutional and sovereign holdings growing despite regulatory scrutiny. By August 2025, the U.S. government held approximately 198,000 BTC from enforcement actions, while nations like El Salvador accumulated over 5,800 BTC as strategic reserves, reflecting a hedge against fiat debasement and eroding the exclusivity of central bank-controlled base money.^[149] Private sector Bitcoin reserves surged, with exchange-traded products and corporate treasuries holding over 1 million BTC by mid-2025, correlating with fiat base contractions and signaling decentralized alternatives' rising role in liquidity provision.^[149] These developments suggest future base dynamics may incorporate hybrid digital-fiat elements, contingent on regulatory evolution and adoption rates.^[147]

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... M2 money multiplier in the US before and after the financial tsunami in 2008-09. As we can see, there was a 40% -60% reduction in money multiplier from 8 -9 ...Missing: pre- | Show results with:pre-
[65]
The Fed - Money, Reserves, and the Transmission of Monetary Policy
Sep 18, 2020 · The effect of reserve balances in simple macroeconomic models often comes through the money multiplier, affecting the money supply and the amount of bank ...
[66]
[PDF] Endogenous Money - Thomas Palley
The Post Keynesian theory of endogenous money has both positive and normative implications. It describes the critical role of lending in the creation of money,.
[67]
[PDF] Money creation in the modern economy - Bank of England
As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some.
[68]
Post-Keynesian money endogeneity evidence in G-7 economies
Post-Keynesian theory of money endogeneity emphasizes the importance of bank loans causing money supply changes. Thus, the proponents of endogenous money ...
[69]
The Endogenous Flow of Credit and the Post Keynesian Theory of ...
18 The increase in loans leads to increases in money balances and allows increases in pro- duction expenditures. Page 18. 788 Marc Lavoie. Portfolio Effects and ...
[70]
Endogenous versus exogenous money: Does the debate really ...
I argue that the debate has been too simplified. In reality, money can be either endogenous or exogenous, depending on several factors.
[71]
[PDF] An Anatomy of Credit Booms: Evidence From Macro Aggregates and ...
Most of these crises either preceded or coincided with the peak of the credit booms, suggesting that many of the booms ended after a country suffered a crisis.
[72]
Open Market Operations - Federal Reserve Board
Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the ...Missing: mechanics | Show results with:mechanics
[73]
[PDF] Implementing Monetary Policy in the United States
May 6, 2015 · Open Market Operations. The Desk conducts open market operations. (purchases or sales of securities) almost every morning. These operations ...
[74]
Discount Window - Federal Reserve Board
May 20, 2024 · The discount window allows depository institutions and US branches and agencies of foreign banks to borrow from Federal Reserve Banks after executing legal ...
[75]
Federal Discount Rate: Definition, vs. Federal Funds Rate
Mar 14, 2023 · The Fed's discount rate is set by the Fed's board of governors, and can be adjusted up or down as a tool of monetary policy. Lending at the ...What Is the Federal Discount... · How the Federal Discount... · Three Discount Rates
[76]
How the Fed Implements Monetary Policy with Its Tools
The discount rate is the interest rate charged by the Fed for loans it makes through the Fed's discount window. Because banks will not likely borrow at a higher ...
[77]
[PDF] Federal Reserve System Reserve Requirements: 1959–88—A Note
Thus, for a given level of the adjusted monetary base, the effects of a change in reserve requi renentq. are countered through the use.of the other tools of the ...
[78]
Interest on Reserve Balances - Federal Reserve Board
The current IORB rate is captured in the table below and in the Board's Data Download Program (DDP). The table and DDP are generally updated each business day ...
[79]
History of Quantitative Easing in the U.S. | ADM
Dec 22, 2021 · The US has implemented quantitative easing four times. The first was in November 2008 in response to the global financial crisis.
[80]
Large-Scale Asset Purchases - Federal Reserve Bank of New York
From November 2008 to March 2010, the first round of large-scale asset purchases included purchases of $175 billion in agency debt, $1.25 trillion in agency MBS ...Missing: QE2 QE3
[81]
Ten Years Later—Did QE Work? - Liberty Street Economics
May 8, 2019 · QE2 consisted of a total purchase of $600 billion in long-term Treasury securities. Finally, the FOMC announced a third round of quantitative ...
[82]
The Mechanics of Quantitative Easing and M2 - Joseph Wang
Aug 25, 2020 · The Fed does a similar type of credit creation when it purchases assets through QE, but instead it creates central bank reserves. Reserves ...
[83]
Large Excess Reserves and the Relationship between Money and ...
Before 2008, reserves paid no interest, so choosing to hold excess reserves meant banks would need to forgo whatever interest they could earn in the market.Missing: pre- | Show results with:pre-
[84]
[PDF] The European Central Bank's Three-Year Long-Term Refinancing ...
Oct 10, 2020 · In the case of the Eurozone, the money obtained via the LTROs could also be used to buy sovereign debt of peripheral countries like Italy and ...
[85]
Targeted longer-term refinancing operations (TLTROs)
The TLTROs, therefore, reinforce the ECB's current accommodative monetary policy stance and strengthen the transmission of monetary policy by further ...
[86]
Quantitative easing | Bank of England
Jun 12, 2025 · Instead, like other central banks, we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds.
[87]
[PDF] Paper - Monetary policy transmission in the euro area: is this time ...
Oct 30, 2024 · Overall, the empirical evidence, obtained via linear SVAR, suggests that it takes approximately. 12 – 18 months for a conventional monetary ...
[88]
[PDF] Expectations, lags, and the transmission of monetary policy - speech ...
Feb 23, 2023 · Economists often reference the 'long and variable' lags of monetary policy, first introduced by Milton Friedman in 1961.
[89]
The Great Depression and the Friedman-Schwartz Hypothesis
We evaluate the Friedman-Schwartz hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression.
[90]
[PDF] Milton Friedman, Anna Schwartz, and A Monetary History of the US
Feb 21, 2019 · They also argue that, to no little extent, the severity of the Great Depression was a result of the Fed's failure to properly implement monetary.
[91]
Reserves at Fed Sink Below $3 Trillion to the Lowest Since 2020
Jan 2, 2025 · Bank reserves fell by about $326 billion in the week through Jan. 1 to $2.89 trillion, according to Fed data released on Thursday.
[92]
A New Reserves Regime? COVID-19 and the Federal Reserve ...
Jul 7, 2020 · In this post, we characterize the increase in reserves between March and June 2020, describing changes to the distribution and concentration of reserves.
[93]
Risk averse banks and excess reserve fluctuations - IDEAS/RePEc
Our model predicts that risk averse banks accumulate substantial holdings of excess reserves in response to large, low-probability shocks to the risk on loans.Missing: post- idle
[94]
What Does Money Velocity Tell Us about Low Inflation in the U.S.?
Sep 1, 2014 · If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money ...
[95]
[PDF] Velocity of Money - Federal Reserve Bank of Richmond
This dramatic decline in velocity throughout the reces- sion and recovery has largely offset the effects of accommodative monetary policy. MZM velocity and M2.
[96]
[PDF] Money and Velocity During Financial Crisis
This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money. [liquidity] demand from changes in uncertainty and risk premia ...
[97]
Fed's Powell suggests tightening program could end soon ... - CNBC
Oct 14, 2025 · Fed Chair Jerome Powell on Tuesday said the central bank is nearing a point where it will stop reducing the size of its bond holdings.
[98]
The Costless Disinflation of 2022-24 | St. Louis Fed
Aug 29, 2024 · Global inflation rose in 2021 and continued to rise well into 2022. The FRED chart below illustrates this rise in inflation for the US, euro area, United ...Missing: base growth 2023-2024
[99]
The Quantity Theory of Money in the Weimar Hyperinflation - Econlib
Nov 16, 2023 · On November 15, 1923, the German Papiermark hit an exchange rate of 2.5 trillion to $1. Two weeks earlier, $1 had bought 133 billion marks; at ...
[100]
Zimbabwe Monetary Policy, 1998–2012: From Hyperinflation to ...
In Zimbabwe's case, hyperinflation arose from rapid growth in central bank reserve money, not just by lending to the government but by excessive direct central ...
[101]
[PDF] Long-run evidence on money growth and inflation - Bank of England
There was a very high correlation between inflation and the growth of base money and M3 around the time of the rapid monetary expansion associated with the.
[102]
Velocity of M2 Money Stock (M2V) | FRED | St. Louis Fed
View data of the frequency at which one unit of currency purchases domestically produced goods and services within a given time period.<|separator|>
[103]
[PDF] Money Growth and Inflation: How Long is the Long-Run?
Aug 1, 1999 · At the same time, many studies have found a strong relationship between long-run averages of money growth and inflation.1 This relationship ...Missing: correlation | Show results with:correlation
[104]
[PDF] Money and Velocity During Financial Crises - Hoover Institution
May 10, 2016 · This study offers a single, consistent model that tracks the velocity of broad money (M2) since. 1929, including the Great Depression, ...
[105]
What Would Milton Friedman Say about the Recent Surge in Money ...
May 2, 2022 · Figure 6 then shows a remarkably tight relationship between real shift-adjusted M2 growth and real GDP growth extending from 1867 through the ...
[106]
Stagflation in the 1970s - Investopedia
Stagflation is the coincidence of weak growth and elevated inflation evident in the 1970s that required monetary policy changes by the Federal Reserve.
[107]
The Inflationary Risks of Rising Federal Deficits and Debt
Mar 12, 2025 · Elevated debt-to-GDP ratios amplify crowding-out risks in the neoclassical framework: the possibility that growing government debt ties up an ...
[108]
(PDF) U.S. Monetary Policy and the Financial Crisis - ResearchGate
Aug 9, 2025 · PDF | This paper reviews U.S. Federal Reserve policy prior to and during the course of the recession that began in December 2007.
[109]
(PDF) The remarkable stability of monetary base velocity in the ...
Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would ...<|control11|><|separator|>
[110]
[PDF] Lessons From The 1979—1982 Monetary Policy Experiment
say, a year or so — shifts in the portfolio ...
[111]
[PDF] The Science of Monetary Policy: A New Keynesian Perspective
The output gap de- pends not only on the current real rate and the demand shock, but also on the expected future paths of these two variables. To the extent ...
[112]
[PDF] The State of New Keynesian Economics: A Partial Assessment
A non-Ricardian fiscal policy, combined with a passive monetary policy, is an example of an alternative fiscal-monetary regime that avoids the problems of ...
[113]
[PDF] Does Expansionary Monetary Policy Cause Asset Price Booms
Our evidence that loose monetary policy (along with low inflation and credit expansion) does contribute significantly to booms in house prices, stock prices ...
[114]
[PDF] MONETARY POLICY ISSUES IN THE 1980s
A symposium on matters relating to the formulation and implemen- tation of monetary policy is particularly timely. The environment for.
[115]
Austrian Business Cycle Theory, Explained - Mises Institute
Jul 9, 2019 · The “boom-bust” cycle is generated by monetary intervention in the market, specifically bank credit expansion to business.
[116]
[PDF] The Austrian Theory of Business Cycles: Old Lessons for Modern ...
Interference by the monetary authorities leads to an artificial boom that creates malinvestment, or a mismatch between investment and future consumption plans. ...
[117]
Friedrich August Hayek - Econlib
Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. ... busts, he argued, is to avoid the booms ...
[118]
[PDF] Austrian Business Cycle Theory and the Global Financial Crisis
Indeed, many mainstream economists have begun to analyze the crisis, perhaps unwittingly so, in terms that sound as if they were derived directly from the Mises ...
[119]
The 2008 Financial Crisis: An Austrian Analysis | YIP Institute
Jun 21, 2021 · According to Keynesian economic theory, recessions are products of an insufficiency of aggregate demand. However, applying the Keynesian line of ...
[120]
Central banking, free banking, and financial crises | The Review of ...
The case against central banking—and for free banking—reverses the characterization of both remedy and malady. Free banking is a part of a market remedy to an ...<|control11|><|separator|>
[121]
Free Banking: Theory, History, and a Laissez-Faire Model
He argues that the debate over central banking and free banking is the most important economic issue of the day. Central banking accepts all the methodological ...
[122]
The Weakness of Modern Monetary Theory | National Affairs
MMT's claims about harmless deficits and debt are false and dangerous, and its claims about printing money without inflation are false.Missing: proposals | Show results with:proposals
[123]
Deficit Financing, the Debt, and “Modern Monetary Theory”
Oct 21, 2019 · MMT suggests that deficit financing can be used without harmful economic effects in circumstances of low inflation rates and low interest rates, ...
[124]
Unraveling the Roots of the German Mark's Collapse - Mises Institute
Dec 14, 2023 · Between 1921 and 1923, the reichsmark—the German currency of the time—plunged into an inflationary spiral, where annual inflation rates exceeded ...
[125]
Venezuela's Economic Collapse Was Enabled by its Central Bank
Jan 22, 2019 · The exponential increase in Venezuela's monetary base as well as in official CPI inflation, had devastating effects on the economy and society ...
[126]
[PDF] A Look to the Future for Venezuela - IDB Publications
the government resorted to monetary financing of the deficit, which led to the country's ravaging hyperinflation. ... Venezuela: Monetary Base and Inflation. ( ...<|separator|>
[127]
The Second World War and Its Aftermath | Federal Reserve History
The Federal Reserve controlled bond prices, reduced interest rates, and the monetary base expanded, leading to inflation. The monetary base increased by 149% ...Missing: temporary | Show results with:temporary
[128]
[PDF] Money Aggregates, Debt, Pent-Up Demand, and Inflation
May 17, 2021 · During WWII, inflation resulted from an unprecedented increase in money supply that supported the massive increase in government expenditures ...
[129]
[PDF] RAPID GROWTH OF MONETARY AGGREGATES AND INFLATION
inflation and monetary aggregates are positively correlated in the long run. ... By construction, all of the episodes had money growth above 10%, but in 29 of the.
[130]
[PDF] Does money growth help explain the recent inflation surge?
Jan 26, 2023 · Panel A illustrates the long-run relationship between inflation and “excess money growth” – the difference between money growth and real GDP ...
[131]
Monetary Policy, Money, and Inflation - San Francisco Fed
Jul 9, 2012 · However, the Federal Reserve has tripled the monetary base since 2008 without inflation surging. With interest rates at historically low levels ...Missing: growth | Show results with:growth
[132]
The (not so) Unconventional Monetary Policy of the European ...
Jul 8, 2014 · This paper reviews in depth the measures adopted by the European Central Bank, and compares them with the ones adopted by the Federal Reserve ...
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Monetary Base - Bank of Japan Statistics - 日本銀行
Bank of Japan Statistics, Currency, Financial Markets, Financial Institutions, Accounts, Deposits and Loans, Market Flow of Funds Related to BIS/FSB, Payment ...Missing: 2008-2012 | Show results with:2008-2012
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Japan's Monetary Base Slides for First Time Since 2008: Economy
Apr 2, 2012 · The monetary base fell 0.2 percent from a year earlier after climbing 11.3 percent in the previous month, a Bank of Japan report showed today.
[135]
Why did the Federal Reserve start paying interest on reserve ...
Mar 1, 2013 · Those occurred when the Fed provided unusual levels of reserves to depository institutions in September 2001 following the terrorist attacks and ...
[136]
[PDF] Why Are Banks Holding So Many Excess Reserves?
Since September 2008, the quantity of reserves in the U.S. banking system has been closely tied to the size of the Fed's liquidity facilities and other ...Missing: post- | Show results with:post-
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Decomposing US Money Supply Changes since the Financial Crisis
In response to the financial crisis of 2008, the Federal Reserve radically increased the monetary base. Banks responded by increasing excess reserves rather ...Missing: velocity | Show results with:velocity
[138]
Balance Sheet Trends - Accessible - Federal Reserve Board
Total Assets of the Federal Reserve In millions of dollars ; 24-Sep-2014, 4459050 ; 1-Oct-2014, 4450260 ; 8-Oct-2014, 4455403 ; 15-Oct-2014, 4474360.
[139]
Could Extended Periods of Ultra-Easy Monetary Policy ... - SUERF
Aug 24, 2023 · The results suggest that the increase in zombie firms correlates negatively with GDP growth. Moreover, Japan and the Eurozone appear to have ...
[140]
Could Extended Periods of Ultra Easy Monetary Policy Have ...
May 19, 2023 · A too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely ...
[141]
[PDF] BIS Working Paper 987: Zombies on the brink: Evidence from Japan ...
We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich ...
[142]
What did the Fed do in response to the COVID-19 crisis? | Brookings
Before coronavirus turmoil hit the market, the Fed was offering $100 billion in overnight repo and $20 billion in two-week repo. Throughout the pandemic, the ...Missing: base | Show results with:base
[143]
The Fed - Central Bank Liquidity Swaps - Federal Reserve Board
The Federal Reserve, and the Swiss National Bank maintain standing US dollar liquidity swap line arrangements to enhance the provision of US dollar liquidity.
[144]
Swap lines curbed global dollar shortages, appreciation during ...
May 21, 2024 · These dollar liquidity facilities (Fed swap lines) helped stabilize the supply and demand imbalances in overseas dollar funding markets.
[145]
Global Monetary Base - Updates and Forecast
Global Monetary Base - Update through September 2024 and 2025 Forecast. GMB was down 0.7% in September and was lower by $520 billion over the last twelve ...
[146]
Recent balance sheet trends - Federal Reserve Board
Choose one of the 5 charts. Total Assets of the Federal Reserve, Selected Assets of the Federal Reserve, Credit Extended through Federal Reserve Liquidity ...Missing: August | Show results with:August
[147]
III. The next-generation monetary and financial system
Jun 24, 2025 · Tokenisation represents a transformative innovation to both improve the old and enable the new. It paves the way for new arrangements in ...
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[PDF] results of the 2024 BIS survey on central bank digital currencies and ...
CBDC is an enhanced digital representation of central bank money and can include both retail and wholesale versions (BIS (2025)). A retail CBDC is a digital ...Missing: tokenization | Show results with:tokenization
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Bitcoin Strategic Reserves - Chainalysis
May 29, 2025 · As official reserves grow, the asset could potentially experience a decrease in volatility, more institutional-grade custody solutions, and ...