The Network Structure of Money Multiplier

87 Pages Posted: 1 Jan 2022 Last revised: 7 Dec 2022

See all articles by Ye Li

Ye Li

University of Washington - Foster School of Business

Yi Li

Board of Governors of the Federal Reserve System

Huijun Sun

Columbia University - Columbia Business School

Date Written: December 6, 2022

Abstract

The money view of banking emphasizes deposits as part of money supply that central banks can manage to influence the macroeconomy (Friedman and Schwartz, 1963). The credit view focuses instead on the asset side of bank balance sheets and proposes a bank lending channel (Bernanke, 1983). In this paper, we show that the monetary role of deposits is in fact key to the credit channel as it connects monetary base and bank lending. As deposits circulate as means of payment, settlement reshuffles liquidity (reserves) among banks. The network topology of such reserve flows determines banks' exposure to liquidity risk and their willingness to invest in illiquid loans. We develop a model to capture this mechanism. Our structural estimation explores transaction-level data and characterizes a money multiplier that emerges from the liquidity percolation in payment system. Payment network generates liquidity externalities of banks' lending decisions and amplifies the volatility of credit supply. A small set of banks are critically positioned in the network and contribute disproportionately to the credit cycle.

Keywords: Credit supply, inside money, payment, network, externalities, systemic risk

JEL Classification: E42, E43, E44, E51, E52, G21, G28

Suggested Citation

Li, Ye and Li, Yi and Sun, Huijun, The Network Structure of Money Multiplier (December 6, 2022). Charles A. Dice Working Paper No. 2021-22, Fisher College of Business Working Paper No. 2021-03-022, Columbia Business School Research Paper , Available at SSRN: https://ssrn.com/abstract=3998037 or http://dx.doi.org/10.2139/ssrn.3998037

Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://https://yeli-macrofinance.com/

Yi Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-721-4576 (Phone)

HOME PAGE: http://sites.google.com/view/yili/

Huijun Sun

Columbia University - Columbia Business School ( email )

NY
United States

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