The Crypto-Centric Money Multiplier: A Divisia Approach to Digital Liquidity

Abstract

The past decade has witnessed unprecedented innovation in financial technology, most notably the rise of cryptocurrency and digital assets. This paper examines how these developments have fundamentally reshaped one of monetary economics’ most enduring concepts: the money multiplier. From Bitcoin’s emergence to today’s complex ecosystem of stablecoins and decentralized finance (DeFi), digital assets have created parallel monetary systems that challenge central banks’ ability to measure and control the money supply (Bianchi et al., 2021).This paper has three primary objectives. First, to develop a theoretical framework that extends Divisia monetary aggregation - the gold standard for measuring money’s liquidity services (Barnett, 1980) to include cryptocurrencies and related digital assets, building on recent work applying Divisia indices to crypto-inclusive money demand (Mumtaz et al., 2025). Second, to derive a new crypto-adjusted money multiplier that captures liquidity creation across both traditional and digital financial systems, integrating the concept of the "crypto multiplier" introduced by Garratt and van Oordt (2023). Third, to analyse the implications for monetary policy transmission and financial stability using a Dynamic Stochastic General Equilibrium (DSGE) model (Fernández-Villaverde et al., 2020), considering the growing synchronization between crypto and global equity cycles (Fund, 2023). By achieving these objectives, we provide policymakers, financial institutions, and researchers with tools to understand and navigate the hybrid financial landscape of the 2020s.