The Network Structure of Money Multiplier

Abstract

The role of deposits in the payment system creates both a liquidity constraint and a liquidity recycling mechanism for the banking system. When financing illiquid loans with deposits, a bank must rely on its liquid assets to cover depositors’ outgoing payments. Therefore, the “money multiplier”—the ratio of loans funded by deposits to liquid assets (i.e., the bank’s liquidity transformation relative to its liquidity base)—cannot be over-stretched. However, depositors’ incoming payments relax this liquidity constraint. We develop a structural model to estimate the overall impact of payments (money velocity) on money multiplier using confidential payment data from Fedwire. The network topology of interbank payment flows plays an important role and determines banks’ systemic importance for the equilibrium outcome.

Presented at: Boston College*, Boston Fed*, Chicago Fed*, Federal Reserve Board*, Frankfurt School of Finance & Management*, Hong Kong University*, INSEAD*, Imperial College London*, Nanyang Technological University*, National University of Singapore*, NYU Stern/Econ (joint)*, Philadelphia Fed*, Singapore Management University*, Stanford GSB*, Tilburg University*, UCLA Anderson*, University of Zurich*, UPenn Wharton*, Wharton Macro Seminar*, Advances in Micro-Finance and CMU*, American Finance Association*, Bank of Canada Conference on Networks in Modern Financial & Payments Systems*, Barcelona School of Economics Summer Forum*, CEPR ESSFM Gerzensee*, CESifo Conference on Money Macro and International Finance*, European Banking Center Network Conference*, European Finance Association*, Federal Reserve Board Conference on the Interconnectedness of Financial Systems*, Financial Intermediation Research Society*, Pacific Northwest Finance Conference*, U Minnesota Finance Junior Conference*, UNC Finance Junior Conference*, U Toronto Econ Junior Conference*

*denotes presentation by co-author