...against fictions and other tall tales

Friday, 4 March 2011

Has QE increased loan activity in the US?

Earlier in the recovery, I recall reading that QE was partly intended to increase bank activity by enabling the monetary base to expand via the "money multiplier", the notion that an increase in bank reserves gets "multiplied" into a larger increase in the broad money supply as banks expand the number of deposits and lending activities. The money multiplier is taught in all macroeconomic intro classes. Well, it might be time to ditch the old "macro 101" textbook. Here's a graph depicting the increase in the monetary base as a result of Fed activity (including QE I and II) since 2006 (red line) and the change in the number of commercial loans in the US (blue line). As you can see, the increase in monetary base is not associated with an increase in bank activity:

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