Risk Management and the Money Multiplier

Damjanovic, T.; Damjanovic, V.; Nolan, C.

Abstract

The conventional model of bank liquidity risk management predicts a negative relation between the risk free rate and the money multiplier. We extend that model to reflect credit, or loan book, risk. We find that credit risk model predicts a positive correlation between the risk free rate and the money multiplier, other things constant. In the pre-financial crisis period the liquidity risk view fits the data better whilst in the post-crisis period, the credit risk management model is more appropriate in explaining the relationship between the money multiplier and the risk free rate. In addition, the model implies that the money multiplier should increase with stock market return and decline with its volatility. We provide evidence that this is indeed the case.

Citation

Damjanovic, T., Damjanovic, V., & Nolan, C. (2016). Risk Management and the Money Multiplier

• Working Paper Type: Working Paper
• Publication Date: Jan 1, 2016
• Deposit Date: May 26, 2017
• Publicly Available Date: Jun 26, 2019
• Series Title: Centre for economic growth and policy working papers
• Public URL: https://durham-repository.worktribe.com/output/1168908
• Publisher URL: https://www.dur.ac.uk/resources/business/working-papers/DDN_money_multiplier.pdf