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Discuss the shortcomings of the traditional bank multiplier model of the process of money creation and present an alternative approach

The Traditional Bank Multiplier writer [Pick the date] Introduction The money supply process deals with the interface between the central bank and the commercial banks . At this point the indirect and complex processes of monetary policy transmission always start independently of the theories in the subsequent stages of this process . It is therefore ,of crucial importance that the right starting point is chosen . According to the two main definitions of money , the process of money supply is related to :The creation of monetary base , which is dominated by the central bank ,and The creation of the money stock , which is determined by the interplay between the central bank , commercial banks , and the non-bank sector ADDIN EN .CITE BofingerPeter BofingerMonetary Policy : Goals , Institutions , Strategies , and Instruments2001Oxford – New YorkOxford University Presshttp /books .google .com /books ?id RprXHOsPzQUC pg PA40 dq traditional bank multiplier model amp as_brr 3 sig gdYhMPhzBMuC2U7JvJUg1ZASUOk PPA40 ,M1 (Bofinger , 2001 .The creation of money emanates from the need of the economy to reproduce itself , and to grow . As firms and the state borrow money to hire labor and purchase other means of production , incomes are created in the process . The creation of money is analogous to the creation of money income .The endogenous nature of money is a result of the nature of money as bank debt , resulting from the needs of the system . In this sense , it is natural endogeneity since it does not depend on any institutional arrangements . While these arrangements may be of considerable importance in discussing relevant innovations in banking practices , they do not alter the pre-eminent nature of money as bank debt , and do not make money endogenous . In other words , money is endogenous irrespective of the accommodative nature of central banks or of liability management ADDIN EN .CITE Rossi20032 226Sergio RossiLouis-Philippe RochonModern Theories of Money : The Nature and Role of Money in Capitalist Economies2003 Cheltenham , UK – Northampton , MA , USAEdward Elgar Publishinghttp /books .google .com /b ooks ?id TAC5fHXg0_QC pg PA169 dq traditional bank multiplier mod el as_brr 3 sig ojxzdIIYkSRlbtShSGogndDQKXA PPA135 ,M1 (Rossi and Rochon , 2003 .In order to discuss the impact of money creation on the monetary aggregate , we extend money transfer models by introducing a banking system , where money creation is achieved by bank loans and the monetary aggregate is determined by the monetary base and the required reserve ratio . The dependence of the monetary aggregate on the required reserve ratio has been illustrated by a simplified multiplier model in traditional economics . However , this model only represents the final result without demonstrating the process . Instead , we examine the evolutionary process of a money transfer model to see how money is created by classifying traders according to the amount of money is created by classifying traders according to the amount of money they hold . By distinguishing different roles they play in the money-transferring process . We find that the monetary aggregate increases proportionally with the number of the traders with no monetary wealth .In a similar framework , we also study how money creation…

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