The creation of money multiplicator is a keynesianisches money-theoretical model, which explains the interaction of central bank, business banks and households with the development of the money supply. The model goes thereby from a multiplication of the central bank money spent by the central bank through the business banks out therefore the term designation multiplicator.

Structure of model

The model functions in three steps. The steps 2 and 3 cause the multiplicator effect by interdependence.

1. Step: Emission of cash by the central bank

Starting point of the consideration is of the central bank produced cash. This passes it on over business banks to the households. It represents thereby first the entire circulating money supply.

2. Step: Deposit of the cash by the household

In a second step the model assumes households want to hold but (for example for safety reasons or because of hoped for interest) as deposit at call into a bank account deposit at least a part of their money not in the form of cash. Free of doubts the fortune of the households did not change thereby - only its composition: A part of the fortune (and concomitantly a part of the money supply) consists still of cash, a part out Buchgeld so mentioned - the money on a bank account.

3. Step: Granting of credit by the business banks

For the completion of the model now additionally the usual operational activity is considered by business banks. This consists usually of entleihen money to a lower interest and lending to a higher interest. This acceptance is considered in the model by the fact that the business banks pass (bar) the money on deposited by their customers to other customers - for example in form of a Dispo credit. The money supply exists now out

• the cash of the households from step 1
• the Buchgeld of these households from step 2
• the received credits of the households from step 3

There the last two elements "“overlap"”, become larger the regarded money supply.

A multiplicator character

The granting of credit taking place in step 3 leads in the model to a partial repetition of the step 2. So a banking customer could take off from his current account over a Dispokredit money and pay with this for example the calculation of a craftsman. This again could deposit the money on its own account and cause so a repetition of step 2.

In principle thus the steps 2 and 3 could repeat themselves for an unlimited period and not lead thus to a foreseeable duplication of the money supply.

Borders of the model and criticism

Reserve attitude of the business banks

The multiplicator character is limited by a simple connection: Banks cannot pass the inserts on of their customers in its entirety as credits. This is on the one hand because of legal restrictions (for example a possibly prescribed minimum reserve, which is at present in the euro area (01/2006) about two per cent of the received inserts) on the other hand also at the economic reason of the bank: She must count on regular disbursement desires of her customers, why she must hold at least a part of the deposited cash as security - otherwise she would run the risk to become at short notice insolvent. This would lead to an enormous Reputationsverlust of the bank and to an annoying of its customers.

Business banks can pass on thus only one part of the received inserts as credits. The portion of the inserts for safety reasons to be again spent, "“does not brake"” the multiplicator effect

Desire of the households for cash attitude

A further weakening experiences the multiplicator effect by the fact that households want to hold only one part of their fortune in the form of Buchgeld - one speaks economicalally of incomplete substitutes. The part of the received money, which the households do not put to the banks at the disposal, is extracted from the cycle.

Result: With each further model run (A) the granting of credit of the banks and (B) the inserts of the households reduce. This causes that the multiplicator comes slowly to succumbing. Mathematically the creation of money multiplicator can be represented as follows:

M1 = MO/(R-S + BH) or also (1 (1 (1-c) * (1-r))) somewhat too many clips however see simply exact;) excess reserve c= portion of the cash discharge r=Mindestreservesatz

M1 is here the money supply, which results from the multiplicator effect, M0 the central bank money, R-S the reserve set of the banks (thus that portion of the inserts, which are not assigned as credit) and BH the portion of the cash attitude of the households of their entire fortune.

Criticism at the model

It exists a whole set of points of criticism at this keynesianisch coined/shaped model.

Thus for example the classical liberalism criticizes that households money not when value storage means regard - money serves therefore only as currency with the purchase of goods. This questions the entire substitution character between without and Buchgeld (and thus also the Muliplikatoreffekt). The classical theory goes instead of it out that restaurant economics keep a part of their fortune in cash as currencies and another part in net assets net yield-bringing and long-term to put on. These belong however after general consent to no money supply definition. Therefore there is no multiplicator effect after purely classical understanding.

Meaning of the model

Also with consideration of the classical and neoclassical points of criticism a "“multiplication"” of the central bank money does not leave itself to denials by the Buchgeld. In national economies, which exhibit a well developed bank system, mature constitute the Buchgeld today far over 90 per cent of the different money supply definitions.

The meaning of the model lies in the implicit questioning of the central bank influence on the money supply. With a meant reserve set of ten per cent (which lies the far over usual reserve sets), 1.000 finally becomes from 100 euro by the multiplicator effect:

100/0,1 = 1.000

Therefore the central bank can steer a tenth of the relevant circulating money supply via its direct monetary political instruments (free-market policy) only - their monetary influence is thus very questionable. However modern central banks (as for example the EZB) have today other effective instruments, with which they also the height of the Buchgeldes can affect - for example the addressed minimum reserve or the possibility of affecting the short term interest on the financial market clearly. Most economists therefore assume the central banks have sufficient monetary influence also in bank-dominated capital markets.

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