Economic Policy Papers derive from policy-oriented research generated by Minneapolis Fed staff and experts. The documents are an intermittent show for the basic market. The views expressed here are the ones for the writers, not always those of other people into the Federal Reserve System.
Executive Overview
Banking institutions in the usa have actually the possibility to improve liquidity unexpectedly and significantly—from $12 trillion to $36 trillion in money and simply accessed deposits—and could thus cause sudden inflation. This might be feasible due to the fact nation’s fractional bank system enables banking institutions to transform extra reserves held during the Federal Reserve into loans from banks at of a ratio that is 10-to-1. Banking institutions might participate in such transformation when they think other banking institutions are planning to do this, in a way much like a bank run that produces a self-fulfilling prophecy.