SSE/EFI Working Paper Series in Economics and Finance
Clearing vs. Leakage: Does Note monopoly Increase Money and Credit Cycles?
Abstract: The effects of note monopolisation on the amplitude of
money and credit cycles are studied. Swedish bank data for 1871–1915 reveal
that money cycles became smaller, but credit cycles larger, after the Bank
of Sweden gained a note monopoly in 1904. At the same time, the money
multiplier decreased, while the credit multiplier increased. If the central
bank's reserve ratio is larger than that of the commercial banks, and if
the currency-deposit ratio is sufficiently large, the leakage effect could
dominate the loss-of-clearing effect (base expansion), such that the money
multiplier decreases. That the credit multiplier simultaneously increased
is attributed mainly to an increasing time-demand deposit ratio, which
increased the credit capacity of the banking system.
Keywords: Clearing mechanism; Credit expansion; Currency-deposit ratio; Fiduciary money; Free banking; Leakage; Money multiplier; (follow links to similar papers)
JEL-Codes: E32; E42; E51; (follow links to similar papers)
34 pages, June 15, 2005
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