What’s up in US Monetary Base?


Every now and then I go to the St. Louis Fed’s website to look at the M1 Money Multiplier. I’ve been fascinated  by this since November 2008. Here’s what I saw at the time (M1 Multiplier):







The M1 Money Multiplier is the ratio of  M1 to the St. Louis Adjusted Monetary Base (AMBSL). I thought it likely at the time  that bank excess reserves dramatically increased when the financial crisis began. I figured that this is the  case because  the AMBSL includes “deposits held by depository institutions at the Federal Reserve Banks.” This is what I saw in November 2008 (St. Louis Adjusted Monetary Base):







By January of 2009 the M1 Money Multiplier dipped below 1 and it has stayed below one since that time (M1 Multiplier):






So I had another look at the AMBSL and saw this (St. Louis Adjusted Monetary Base):







What happened to Monetary Base in January 2011? Why did it spike again? Notice that the M1 Money Multiplier dipped. Have banks increased their reserves again? Why?

One thing that I haven’t been able to figure out is whether the AMBSL is capturing something else. Is it capturing “toxic assets” and recording them as bank reserves? If this indeed is the case, then what’s going on with the January spike? Has the Fed rescued something again? Please help me!


5 Responses to "What’s up in US Monetary Base?"
  1. This is just Q2 isn’t it? The Fed started expanding its balance sheet again at the end of 2010. Remember, assets have to equal liabilities, so the counterpart to increasing its holdings of securities (assets), liabilities also have to increase. In this case it mainly comes through an increase in excess reserves…It certainly isn’t an increase in the holdings of toxic assets…

  2. updated:
    It doesn’t explain why the money multiplier is  below 1 and why it was driven down again.  

    If it is Fed. QE2, the Fed buys Treasuries. This goes into AMBSL. But doesn’t show up in M1,Broad Money?

    So the mystery is about what treasury is doing with the funds. Why aren’t they showing up in monetary aggregates.
    One explanation could be that Treasury is keeping deposits at Fed. When they run down these deposits, they’ll show up in M1,Broad Money.  

    In this case multiplier should be calculated as

    M1/(AMBSL – ????.)

    but what’s ????
    see comment below.

  3. Excess reserves have not gone down in the past 6 months. That cleveland Fed analysis is from before QE2.

    Go on to the Fed website and look at the latest data (factors absorbing and supply reserve balances) and you will see exactly what is happening on the asset and liability side.

  4. Yep go to the Fed website. Does remind me of my thesis. Took me 2 weeks to figure out why my regression results for Canada were screwed up. Then I graphed M2 – huge spike was driving the results. Caused by a postal strike and the cheques getting stuck in the mail. Lesson. Graph the data (well done!).

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