Monetary Policy and the Behavior of Banks: Lessons from the 1930s for the 2010s

The Fed continues to reassure its critics that it will be able to identify changes in the economy quickly enough to prevent an inflationary surge. But critics are skeptical for good reason. There is cause for concern that the Fed may be slow to detect a sudden shift in the money multiplier. That concern — which is informed by an understanding of the micro-foundations of the money multiplier, as illustrated by the history of the 1930s — is the subject of this article.