Beyond the static money multiplier
In search of a dynamic theory of money
Michele Berardi
University of Manchester
March 2007
Abstract
In this paper, we analyze the process of money creation in a credit
economy. We start from the consideration that the traditional money
multiplier is a poor description of this process and present an alternative
and dynamic approach that takes into account the heterogeneity of agents
in the economy and their interactions. We show that this heterogeneity
can account for the instability of the multiplier and that it can make
the system path-dependent. By using concepts and techniques borrowed
from network theory and statistical mechanics, we then try to shed some
light on the actual process by which money is endogenously created in an
economy.
Money, Money multiplier, Network theory, Statistical mechanics.
1 Introduction
Though we all live in a monetary economy where credit money plays a fun-
damental role, the process through which money is created in the economy is
largely neglected by modern macroeconomic theory. A common approach main-
tains that the process starts with an exogenous increase in the monetary base
made by the central bank, and that this, through a fixed multiplier, gives rise
to a proportional increase in the amount of money in the economy. The multi-
plier is usually taken as constant in this process, at least on short time scales,
and most importantly, independent from the money creation process itself. The
result is essentially a static, aggregate theory, with very poor behavioural mi-
crofoundations, that completely neglects the process through which money is
generated in an economy.
As a consequence of this representation, money is taken to be exogenously
determined and its quantity explained through changes in the monetary base
magnified proportionally by the fixed multiplier. Unfortunately, this theory is
not able to provide any insights about the process that generates money in a
credit economy, apart from assuming that changes in the monetary stock are
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