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Seminar 7: Money
(a) Explain what is meant by an endogenous money supply.
(b) What are the implications of an endogenous money supply for economic policy?
Money = endogenous to economy - no dichotomy - important in Keynesian economics.
Political economy : the contest of economic ideas / Frank Stilwell.
CH31
Keynesian analysis - capitalist economy = monetary economy. In order to
understand the economy - need to study aggregate demand and supply of
goods and services. Also requires the study of the significance of money itself
in the economy.
Need to make a distinction between money and income in the form of money.
Money = cash; notes and coins to facilitate exchange and includes other
liquid assets such as bank deposits - easily converted into cash.
Income = payments people receive as rewards for their work and interest on
their savings, profits on their investments or inheritance or gambling profits.
Can be in the form of money or goods and services.
Role of Money + National income - relationship.
Introduction to post-Keynesian economics / Marc Lavoie CH3
- Main Characteristics of post-keynesian monetary analysis.
- Reverse causation: cornerstone of post-keynesian analysis is its
theory of endogenous money, where the supply of money
cannot be set arbitrarily by the central bank: it is determined
by the demand for bank credit (loans) and the public’s
preferences. The supply of money is not independent of the
needs of the economy: ‘loans create deposits’.
- The causality between loans and deposits is reversed - no need
for banks to have access to prior deposits in order to extend
loans.
- Creation of credit money is not the result of excess reserves held
by private banks - causality also reversed here. Banks first extend
loans - creating deposits in the process. If bank customers
request bank notes (cash or currency), banks can get them
directly from the central bank. Banks also obtain their required
reserves, dictated by law, from the central bank (Moore,1988)
- Bank money (deposits) is endogenous and demand-determined -
cannot be imposed arbitrarily by the central bank - volume of
high- powered money is directly related to the supply of bank
loans and money through the credit divisor. Bank money is not a
, multiple of high-powered money as claimed by neoclassical
theorists - high-powered money is a quotient of the quantity of
bank money.
Two Theories of Money Supply Endogeneity: Some Empirical
Evidence
- The rate of money supply growth and credit availability are
fundamentally determined by demand-side pressures within
financial markets.
- When banks and other intermediaries hold insufficient reserves, central
banks must necessarily accommodate their needs. To act otherwise
would threaten the variability of the financial structure, and hence of the
overall economy. Central banks can choose the means through which
they will accommodate: either by increasing the availability of
nonborrowed reserves through expansionary open market operations or
by forcing banks to obtain borrowed reserves through the discount
window. This decision will affect the cost to the banks of obtaining their
needed reserves but central banks are obligated to accommodate
demand for reserves at the discount window so no effective quantity
constraint exists on banks’ reserve needs.
- Approach referred to as a theory of accommodative money supply
endogeneity.
- Market interest rates are not strictly governed by the Federal Reserve
intervention - they are, rather, determined by a complex set of
interactions between the Federal Reserve and the financial markets.
The Federal Reserve exogenously administers interest rates; leads to a
rigid framework for monetary analysis that is inconsistent with complex
financial market behaviour.
Monetary Policy with Endogenous Money and Liquidity
Preference: A Non Dualistic Treatment
- Origin of money supply was ascribed to bank lending - initiated by
borrowers. Authorities retained the capacity to set the rate of interest
but could not control the money supply at all.
- Structuralism offered a middle way - stressed capacity of the
banking system to innovate in order to circumvent regulations and
the expense of keeping reserves to satisfy the authorities,
structuralists portray monetary policy as effective in the short run
but outwitted and subverted by the banking system in the longer
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