<p>According to <a href="https://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780190626198.001.0001/oxfordhb-9780190626198-e-12" rel="nofollow noreferrer">Gambacorta and Mizen (2019)</a> a number of factors explain the 2008 crisis (and insofar post-crisis) multiplier:</p>

<ul>
<li><p>banks factor in may more things than the interest rate nowadays, of their own accord</p></li>
<li><p>they are also obligated to comply with more regulatory oversight</p></li>
</ul>

<blockquote>
  <p>Before the global financial crisis, the world was a simpler and more innocent place [...]. Although there were many risks that had not been properly priced into funding
  costs for banks, lending was funded at the margin in relation to short-term market rates
  that closely followed policy rates. Since then, that innocence has been lost, and funding
  costs reflect a range of risks that were small and largely ignored previously. The
  academic work on interest-rate pass-through reflects this more complex environment,
  allowing for a blend of funding sources that combine to give information on the cost of
  bank funding, which can often depart from policy rates by some margin. New channels of
  transmission have been developed to reflect the bank lending, bank capital, and risk-taking
  channels, which take on greater significance in the postcrisis world. Similarly,
  since monetary policy has been conducted using FG [forward guidance], the impact has been on
  future rather than current financial-market conditions requiring models that allow banks
  to form forecasts of future funding costs. Unconventional policies relying on liquidity
  operations, asset purchases, and conditional lending schemes have influenced long-term
  rates of interest rather than overnight rates, and new approaches have been developed to
  consider the effects of these policies on banks. Despite many concerns about the
  weakening of monetary transmission, the results of these new developments have pointed
  to a strong and robust relationship between policy measures and the retail rates that
  affect households and firms. In this respect, central banks can be reassured that the
  innovations in the making of monetary policy in the postcrisis era have proven effective in maintaining control over lending and deposit rates.</p>
  
  <p>What can we expect in the future for interest-rate pass-through and monetary
  transmission? Institutional change is under way, as part of the process that aims to avoid
  a repeat of the crisis in 2007–2008. Banks are now regulated to a greater degree, and
  liquidity and capital buffers are mandated to avoid dangers of illiquidity and insolvency
  among individual banks spilling over into the banking system as a whole. The Basel
  Committee on Banking Supervision will introduce reforms in the form of Basel III to strengthen the regulation, supervision, and risk management of the banking sector. These
  measures aim to improve the banking sector’s ability to absorb shocks arising from
  financial and economic stress, whatever the source, to improve risk management and
  governance of banks and strengthen banks’ transparency and disclosures.
  Microprudential regulation will help raise the resilience of individual banking institutions
  to periods of stress, while macroprudential regulation will reduce system-wide risks that
  can build up across the banking sector as well as the procyclical amplification of these
  risks over time. These changes will increase the cost of certain types of funding and at
  the same time reduce the risks associated with banks, which may reduce the costs of
  others.</p>
</blockquote>

<p>A number of empirical studies are cited in support, mostly from the EU, e.g.</p>

<ul>
<li><p>Banerjee, A., V. Bystrov, and P. D. Mizen. 2017. “Structural Factor Analysis of Interest Rate Pass Through in Four Large Euro Area Economies.” Working Papers in Economics 17/07, University of Canterbury, Department of Economics and Finance.</p></li>
<li><p>Harimohan, Rashmi, Michael McLeay, and Garry Young. 2016. “Pass-Through of Bank
Funding Costs to Lending and Deposit Rates: Lessons from the Financial Crisis.” Bank of
England working paper 590.</p></li>
</ul>

<p>Identifying the new channels of transmission seems a pretty active area of research.</p>

<p><a href="https://voxeu.org/article/quantitative-easing-and-hot-potato-effect" rel="nofollow noreferrer">Rhyan and Whelan (2019)</a> mention that the most influential theory insofar seems to be the "portfolio rebalancing channel":</p>

<blockquote>
  <p>money multipliers in the US, the UK, and the euro area dropped sharply following the introduction of QE, an outcome which is at odds with the predictions of a textbook money multiplier framework. The QE literature has instead focused mainly on the effect of changes in the net supply of bonds to the private sector in reducing bond yields, i.e. a portfolio rebalancing channel (e.g. Gagnon et al. 2011).</p>
</blockquote>

<p><a href="https://www.ijcb.org/journal/ijcb11q1a1.htm" rel="nofollow noreferrer">Gagnon et al. (2011)</a> ("The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases
") has some 700 citations in Google Scholar. A more recent paper like that from the Euro area is <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2125.en.pdf" rel="nofollow noreferrer">Albertazzi et al., 2018</a>.</p>

<p>Basically QE has rendered the usual crediting done by banks less attractive, so there's a shift ("portfolio rebalance") toward riskier assets/loans. But there's apparently more regulatory limit on those.</p>

CC BY-SA 4.0
2019-05-30T03:34:13.997Z
2019-05-30T04:13:01.817Z
2019-05-30T04:13:01.817Z
fantastic peace and prosperity
<p>You may want to look at the following paper by <a href="https://m.tau.ac.il/~alexcuk/pdf/Cukierman%202017.pdf" rel="nofollow noreferrer">Cukierman (2017)</a>. The author compares inflation for a period of identical base expansion in post Lehman US and hyper-inflationary Germany in the 1920s. They mention exactly what you said, that banks have increased their reserves at the Fed. In the US this has not translated into a heightened demand for goods and services as was the case in Germany. Furthermore the author cites fundamental differences in the economical and institutional circumstances as a reason for the difference in transmission. I suggest reading the paper for a more in depth explanation. </p>

CC BY-SA 4.0
2019-05-30T03:00:29.447Z
There's a paper related to that ([Lopez and Mitchener, 2018](https://www.frbsf.org/economic-research/files/wp2018-06.pdf)) which analyzes more countries post WWI and concludes that uncertainty was the main factor for hyperinflation
fantastic peace and prosperity
CC BY-SA 4.0
2019-05-29T09:05:59.220Z
2019-05-29T09:05:59.220Z
Elias K.
<p>QE meant that the monetary base increased dramatically, yet we don't see such a large reaction in money supply (I am thinking of M4 for the UK) nor in inflation. Why is this money not being lent out? Are banks keeping large excess reserves for fear of a crash?</p>

<p>I know this is a quite common question but I still don't understand what the accepted answer is here.</p>

<macroeconomics><central-banking><quantitative-easing>
What happened to the money multiplier after QE?
Lorenzo 
# What happened to the money multiplier after QE?

(Asked by: username_0 on 2019-05-28)

QE meant that the monetary base increased dramatically, yet we don't see such a large reaction in money supply (I am thinking of M4 for the UK) nor in inflation. Why is this money not being lent out? Are banks keeping large excess reserves for fear of a crash?

I know this is a quite common question but I still don't understand what the accepted answer is here.

**Tags:** macroeconomics, central-banking, quantitative-easing


---

## 2 answers

### Answer by username_1 on 2019-05-30. Score: 2 | Accepted answer

According to [Gambacorta and Mizen (2019)](https://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780190626198.001.0001/oxfordhb-9780190626198-e-12) a number of factors explain the 2008 crisis (and insofar post-crisis) multiplier:

* banks factor in may more things than the interest rate nowadays, of their own accord
* they are also obligated to comply with more regulatory oversight

> Before the global financial crisis, the world was a simpler and more innocent place [...]. Although there were many risks that had not been properly priced into funding
> costs for banks, lending was funded at the margin in relation to short-term market rates
> that closely followed policy rates. Since then, that innocence has been lost, and funding
> costs reflect a range of risks that were small and largely ignored previously. The
> academic work on interest-rate pass-through reflects this more complex environment,
> allowing for a blend of funding sources that combine to give information on the cost of
> bank funding, which can often depart from policy rates by some margin. New channels of
> transmission have been developed to reflect the bank lending, bank capital, and risk-taking
> channels, which take on greater significance in the postcrisis world. Similarly,
> since monetary policy has been conducted using FG [forward guidance], the impact has been on
> future rather than current financial-market conditions requiring models that allow banks
> to form forecasts of future funding costs. Unconventional policies relying on liquidity
> operations, asset purchases, and conditional lending schemes have influenced long-term
> rates of interest rather than overnight rates, and new approaches have been developed to
> consider the effects of these policies on banks. Despite many concerns about the
> weakening of monetary transmission, the results of these new developments have pointed
> to a strong and robust relationship between policy measures and the retail rates that
> affect households and firms. In this respect, central banks can be reassured that the
> innovations in the making of monetary policy in the postcrisis era have proven effective in maintaining control over lending and deposit rates.
>
> What can we expect in the future for interest-rate pass-through and monetary
> transmission? Institutional change is under way, as part of the process that aims to avoid
> a repeat of the crisis in 2007–2008. Banks are now regulated to a greater degree, and
> liquidity and capital buffers are mandated to avoid dangers of illiquidity and insolvency
> among individual banks spilling over into the banking system as a whole. The Basel
> Committee on Banking Supervision will introduce reforms in the form of Basel III to strengthen the regulation, supervision, and risk management of the banking sector. These
> measures aim to improve the banking sector’s ability to absorb shocks arising from
> financial and economic stress, whatever the source, to improve risk management and
> governance of banks and strengthen banks’ transparency and disclosures.
> Microprudential regulation will help raise the resilience of individual banking institutions
> to periods of stress, while macroprudential regulation will reduce system-wide risks that
> can build up across the banking sector as well as the procyclical amplification of these
> risks over time. These changes will increase the cost of certain types of funding and at
> the same time reduce the risks associated with banks, which may reduce the costs of
> others.

A number of empirical studies are cited in support, mostly from the EU, e.g.

* Banerjee, A., V. Bystrov, and P. D. Mizen. 2017. “Structural Factor Analysis of Interest Rate Pass Through in Four Large Euro Area Economies.” Working Papers in Economics 17/07, University of Canterbury, Department of Economics and Finance.
* Harimohan, Rashmi, Michael McLeay, and Garry Young. 2016. “Pass-Through of Bank
  Funding Costs to Lending and Deposit Rates: Lessons from the Financial Crisis.” Bank of
  England working paper 590.

Identifying the new channels of transmission seems a pretty active area of research.

[Rhyan and Whelan (2019)](https://voxeu.org/article/quantitative-easing-and-hot-potato-effect) mention that the most influential theory insofar seems to be the "portfolio rebalancing channel":

> money multipliers in the US, the UK, and the euro area dropped sharply following the introduction of QE, an outcome which is at odds with the predictions of a textbook money multiplier framework. The QE literature has instead focused mainly on the effect of changes in the net supply of bonds to the private sector in reducing bond yields, i.e. a portfolio rebalancing channel (e.g. Gagnon et al. 2011).

[Gagnon et al. (2011)](https://www.ijcb.org/journal/ijcb11q1a1.htm) ("The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases
") has some 700 citations in Google Scholar. A more recent paper like that from the Euro area is [Albertazzi et al., 2018](https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2125.en.pdf).

Basically QE has rendered the usual crediting done by banks less attractive, so there's a shift ("portfolio rebalance") toward riskier assets/loans. But there's apparently more regulatory limit on those.


---

### Answer by username_2 on 2019-05-29. Score: 2

You may want to look at the following paper by [Cukierman (2017)](https://m.tau.ac.il/~alexcuk/pdf/Cukierman%202017.pdf). The author compares inflation for a period of identical base expansion in post Lehman US and hyper-inflationary Germany in the 1920s. They mention exactly what you said, that banks have increased their reserves at the Fed. In the US this has not translated into a heightened demand for goods and services as was the case in Germany. Furthermore the author cites fundamental differences in the economical and institutional circumstances as a reason for the difference in transmission. I suggest reading the paper for a more in depth explanation.

> **Comments:**
> **username_1**: There's a paper related to that ([Lopez and Mitchener, 2018](https://www.frbsf.org/economic-research/files/wp2018-06.pdf)) which analyzes more countries post WWI and concludes that uncertainty was the main factor for hyperinflation  

---

