[RobertoG]

The money multiplier model brings to mind a comment, in a Terry Pratchett book, where one of the characters says something like "everybody knows what the wind is, the wind is what happens when the trees move their branches".

If you have a model that have the components right but the causality going in total opposite direction, I think is kind of fair to criticize its pedagogic value.

[notahacker]

But all it does is say "this is how a banking system can create n dollars from x dollars". It's also historically correct: banks created leverage from a fixed currency supply exactly as described before the endogenous money era, and the whole reason endogenous money exists is because the government decided that facilitating this money creation with their own was better than bank runs and wildly fluctuating lending rates.

The week after, students learn about money markets, credit and money demand as liquidity preference.

And MMTers aren't saying "the second week of undergrad teaching could be improved by refining this model", they're saying "mainstream economics is built on this foundation that only we are clever enough to know isn't true".

Props for the Pratchett quote though. Sounds like something Detritus would have said. :)

[RobertoG]

The reason MMTers (and I'm not a religious man, but I suppose that, in a way I have been converted) have to fight the Money Multiplier thing is because of this conversation:

MMTer: Public debt can be monetized, inflation is created by spending (public or otherwise) not by more reserves, central banks can control the interest rate independently of the quantity of reserves in the system.

Anti-MMTer: Wait, if you add reserves to the system, banks can lend more! That's inflationary!

MMTer: Banks can lend always anyway if makes business sense. Their only limit is the capital requirements of every particular bank. If lending makes business sense, banks can find the legally required reserves, they are not constrained by reserves.

Anti-MMTer: But the Money Multiplier!

MMTer: Facepalm

I wish I could remember in what book was the Terry Pratchett quote. It's a great quote.

[notahacker]

I can't think of a single macroeconomist that would say "but the money multiplier" though. This is a straw man invented by MMTers to avoid debate.

Literally every single central bank's policies are designed and implemented by mainstream macroeconomists, as were the capital requirements. "Banks can lend always anyway if it makes business sense" is the system mainstream macro built. Of course, mainstream economists also consider the "if it makes business sense" bit (and to a degree the "capital requirements" bit) matters, and have models observing that the flow of money actually injected into the economy at a given interest rate being finite and relatively predictable, and they can make it go up or down in different circumstances by changing that interest rate. They also (since the 80s, at least) have a sophisticated enough grasp of inflation to figure that how the dollars are injected into the economy matters rather a lot.