Bank reserves: Thesis, antithesis, synthesis

posted by
January 16, 2011
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by Robert P. Murphy  
Posted in Commentary

"We all know the standard textbook story of fractional reserve money creation: The Fed buys assets and creates new reserves (“out of thin air”). Armed with the new reserves, the commercial banks now have excess reserves, so they go lend it out. Thus, the causality goes like this: Fed creates new base money. ==> Banks have excess reserves. ==> Banks create new M1. The only problem is, that’s not how it works in the real world." (01/15/11)  

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