WE OBSERVE IN real-world data a great deal of fluctuation in our measures of the money stock. Why is this so? Are central banks playing with the money stock, capriciously increasing or decreasing it? To this point in our studies, the government has determined the nominal stock of money through its complete control over the monetary base and reserve requirements. We observe, however, that central banks often miss their announced targets for the money stock. Are the people in charge hopelessly incompetent, or have our models overlooked some important source of fluctuation in the money stock?

By definition, the total money stock is the product of the monetary base and the money multiplier. When we observe (as we do) changes in the money stock that do not come from changes in the monetary base, they must result from changes in the money multiplier. If the money multiplier is random, a central bank cannot exactly predict the total money supply even though it knows how much money it has printed (the monetary base). In Chapter 8 the money multiplier was found to be simply the inverse of the reserve requirement. Because reserve requirements rarely change (and would be well known to the central bank), they cannot be the source of the observed fluctuations in the money multiplier. Something else must be responsible.

Figure 9.1 plots quarterly money multiplier data for the U.S economy. Note the patterns in the money multiplier in relation to recession years (shaded regions of the graph).

Fluctuations in the money multiplier are of special interest because they appear to be linked with real output.