The Network Structure of Money Multiplier

71 Pages Posted: 1 Jan 2022 Last revised: 7 May 2024

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: January 1, 2022

Abstract

Deposits finance bank lending and function as means of payment for the rest of the economy. While loans are generally illiquid and often held until maturity, deposits circulate among banks as depositors transact with one another. Except for rare instances where payment inflows and outflows perfectly balance, payment introduces liquidity risks and constrains the "money multiplier"---the ratio of loans financed by deposits to banks' liquid assets that buffer potential deposit outflows. We develop a model of bank lending and payment system where this multiplier depends on the network topology of interbank payment flows that churn liquidity among banks. We estimate the model using Fedwire payment data and identify banks that have a large impact on the equilibrium multiplier due to their systemic importance in the payment network.

Keywords: Payment, network, deposits, credit supply, money multiplier, money velocity

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 (January 1, 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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