The Network Structure of Money Multiplier

72 Pages Posted: 1 Jan 2022 Last revised: 3 Jan 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: December 31, 2023

Abstract

The circulation of deposits as means of payment churns reserves—the settlement assets—among banks. A bank's position in the network of payment flows determines its liquidity risk from depositors' payment activities and its willingness to fund illiquid loans with deposits. We develop a model of liquidity percolation in the payment system and a modern version of money multiplier that links the payment-induced redistribution of liquidity and equilibrium level of bank credit funded by deposits. Using transaction-level data on payment settlement, we estimate the model and identify a subset of banks that have disproportionately large impact on the equilibrium outcome due to their systemically importance in the payment network.

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 31, 2023). 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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