Risk Management and the Money Multiplier

Damjanovic, T.; Damjanovic, V.; Nolan, C.

Risk Management and the Money Multiplier

Damjanovic, T.; Damjanovic, V.; Nolan, C.

Authors

Professor Tatiana Damjanovic tatiana.damjanovic@durham.ac.uk
Professor

V. Damjanovic

C. Nolan

Abstract

The conventional model of bank liquidity risk management predicts a negative relation between the risk free rate and the money multiplier. We extend that model to reﬂect credit, or loan book, risk. We ﬁnd that credit risk model predicts a positive correlation between the risk free rate and the money multiplier, other things constant. In the pre-ﬁnancial crisis period the liquidity risk view ﬁts the data better whilst in the post-crisis period, the credit risk management model is more appropriate in explaining the relationship between the money multiplier and the risk free rate. In addition, the model implies that the money multiplier should increase with stock market return and decline with its volatility. We provide evidence that this is indeed the case.

Citation

Damjanovic, T., Damjanovic, V., & Nolan, C. (2016). Risk Management and the Money Multiplier

Publication Date	Jan 1, 2016
Deposit Date	May 26, 2017
Publicly Available Date	Jun 26, 2019
Series Title	Centre for economic growth and policy working papers
Public URL	https://durham-repository.worktribe.com/output/1168908
Publisher URL	https://www.dur.ac.uk/resources/business/working-papers/DDN_money_multiplier.pdf