Something unusal happened yesterday in my weekly department macroeconomics seminar at James Madison University. Someone had us discuss a paper that changed the minds of pretty much everybody in the room who did not already agree with the paper, which includes a highly diverse group ranging from Austrian, Old Monetarist, New Classical, New Keynesian, Old Keynesian, Post Keynesian, and some generally eclectic pragmatists. The paper is from the Fed Bd of Govs in 2010, by Seth Carpenter and Selva Demiralp, still unpublished as near as I can tell, and is entitled, "Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?" Their answer is not only "no," which I at least have thought was true since 2007 or so, but that the answer has been "no" probably since the mid-1980s and certainly since the mid-1990s. It is available at http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf .
The story can be seen pretty much in figures and charts in the back. Prior to 1984, there was a clear correlation between reserves, loans, and M2. After then, while loans and M2 continued to go along in a pretty close lockstep, reserves simply have flopped around all over the place. This seems to have coincided with various things: a definite move to targeting interest rates and apparently following a Taylor rule (although not more recently on the latter), the change in Regulation Q, globalization, a broadening of sources of funds for banks, and particularly more interbank lending and lessening of reliance on reserves and the Fed's reserve base. Apparently up to the mid-90s, small umdercapitalized banks still were tied to reserves in their lending, but after then that broke down too, with their appearing to be a shift to relying more on large deposits, mostly from other banks and also the shadow banking system.
That Fed control over the money supply has become a phantom has been quite clear since the Minsky moment in 2008, with the Fed massively expanding its balance sheet without much resulting increase in measured money supply. This of course has made a hash of all the people ranting about the Fed "printing money," which presumably will lead to hyperinflation any minute (eeek!). But the deeper story that some of us were unaware of is that apparently this disjuncture happened a long time ago. Even so, one of our number pointed out that official Fed literature and even many Fed employees still sell the reserve base story tied to a money multiplier to the public, just as one continues to find it in the textbooks, But apparently most of them know better, and the money multiplier became a myth a long time ago.