Endogenous Money Research Articles

Endogenous money, liquidity and monetary reform*

Following its revival in the 1980s, the idea of endogenous money became increasingly widely accepted. Indeed the 2008 global financial crisis was widely blamed on the untrammelled power of banks to create credit. As a result, among the ideas for reforming the monetary system are proposals designed to eliminate that power, that is, to make the money supply exogenous. The purpose of this paper is to go back to the theory of endogenous money in order to assess these proposals, in terms of what is desirable, but also crucially what is feasible. Central to this discussion is a consideration of the range of meanings given to money and endogeneity. It is argued that what is regarded as money under different conditions is an important element in money endogeneity, and is particularly relevant for the monetary reform debate.

The Credit Money, State Money, and Endogenous Money Approach: A Survey and Attempted Integration

The primary purpose of this article will be to draw out explicitly the links among the state money, credit money, and endogenous money approaches, after first discussing the nature of money via historical and sociological analysis. The state money approach is associated with Knapp, Keynes, and Lerner, while the credit money approach is associated with Schumpeter and more loosely with the endogenous money approach. Innes provided an integration of the state money and credit money approaches, but his work was long forgotten. Post Keynesians (and to a lesser extent, Institutionalists) have participated in a modern revival of an endogenous money approach that was common in the nineteenth century, although most recent writers on the endogenous money approach have not explored links to the credit money and state money approaches. While this article did not trace the development of the endogenous money approach, it will show how it relates to the state money and credit money approaches. Keywords: credit money, state money, endogenous money, horizontalism, origins of money, nature of money. DOI: 10.7176/DCS/10-2-04 Publication date: February 29 th 2020

Payment vs. Funding: The Law of Reflux for Today

The analytical tension in post-Keynesian thought between the theory of endogenous (credit) money and the theory of liquidity preference, brought to our attention by Dow and Dow (1989), can be viewed through the lens of the money view (Mehrling 2013) as a particular case of the balance between the elasticity of payment and the discipline of funding. Further, updating Fullarton’s 1844 “law of reflux” for the modern condition of financial globalization and market- based credit, the same money view lens offers a critical entry point into Tobin’s fateful 1963 intervention “Commercial Banks as Creators of ‘Money’” which established post-war orthodoxy, and also to the challenge offered by so-called Modern Money Theory.

On the Monetary Nature of the Principle of Effective Demand

Since the publication of The General Theory the relationship between money and the principle of effective demand has been a matter of never-ending studies by the Keynesian economists. There are at least three different ways to explain this relationship. The first explanation lies in the liquidity preference theory. The second, points out that the decisions to accumulate a kind of money differing from a commodity obtained by labor may cause a level of aggregate demand insufficient to absorb the level of income corresponding to full employment. Finally, the third explanation is associated with the endogenous money theory. The first aim of this paper is to highlight the limits of these analyses. The second aim is to present a different explanation of the monetary nature of the principle of effective demand based on Schumpeter’s analytical approach which underlines the role of bank money in a capitalist economy.

Critical macro-finance, Post Keynesian monetary theory and emerging economies

In our contribution to this forum, we suggest that critical macro-finance (CMF) scholars and Post Keynesian monetary theorists would profit from a more explicit engagement with each other. Post Keynesian scholars would benefit from the detailed empirical insights that CMF provides, particularly through its analysis of non-bank financial institutions and the conceptual focus on liquidity and liabilities. Meanwhile, the CMF literature would benefit from more explicit grounding in earlier Post Keynesian concepts. In particular, the theory of liquidity preference, the concept of the liquidity premium, and the theory of endogenous money highlight macroeconomic issues missing from CMF scholarship.

Эндогенность предложения денег в российской экономике в условиях смены монетарного режима

The article deals with the endogeneity of money supply in the Russian economy in the context of the changes made to the rules of monetary regulation. We summarized and analyzed the basic concepts of the modern theory of endogenous money, and described the approaches of various researchers to studying the impact of financial innovations and changes in the principles of monetary regulation on money supply endogeneity. In the empirical part of the research, in order to test the hypothesis on the endogenous origin of the money supply in the Russian economy in 2010–2018, we applied the Granger causality test and the Johansen cointegration test as well as VAR and VECM models. The study was based on the monthly data for the monetary sphere (M2 monetary aggregate, monetary base, and money multiplier), the banking sphere (loans, deposits, and interest rate) and the transactional sector of the economy (wholesale and retail turnover). We split the time series into two intervals: 2010–2013 and 2014–2018, because the monetary regime was being changed significantly throughout 2013–2014. As a result, the hypothesis of money supply endogeneity has not been rejected for both periods of time, and evidence of structuralism has been revealed. In the short term of 2010–2013, it was mainly commercial banks that reacted to an increase in money demand (through money multiplier); however, in the long run the Central Bank of Russia prevailed (through changing the monetary base). Nevertheless, in 2014–2018 the Bank of Russia demonstrated an efficient adjustment of money supply toward money demand, which had been reflected in the response of the monetary base in the short term. Meanwhile, in this period the role of commercial banks in lending was increased through operational managing of their own resources, which was reflected in the reaction of the money multiplier to the growth of business activity in the country. These changes indicated an amplification of money supply endogeneity in the Russian economy. In addition to passive adaptation, we revealed a particular activism in the monetary sphere, when the initiative of money emission came not so much from the monetary authorities as from commercial banks fighting for a market share in the face of intensified banking competition and reduced bank margins.

Editorial to the Special Issue: The Monetary Economics of Basil J. Moore

This paper outlines endogenous money theory (EMT) and the contributions of Basil J. Moore to EMT. It then describes the various papers that will appear in Volume 17, Issue 3 (2020) of the European Journal of Economics and Economic Policies: Intervention. Coolectively, these papers explore the monetary economics of Basil J. Moore – its origins, substance, and application – in light of its status as an ongoing and still-developing research project.

The 'Kansas City' Approach to Modern Money Theory

Modern money theory (MMT) synthesizes several traditions from heterodox economics. Its focus is on describing monetary and fiscal operations in nations that issue a sovereign currency. As such, it applies Georg Friedrich Knapp’s state money approach (chartalism), also adopted by John Maynard Keynes in his Treatise on Money. MMT emphasizes the difference between a sovereign currency issuer and a sovereign currency user with respect to issues such as fiscal and monetary policy space, ability to make all payments as they come due, credit worthiness, and insolvency. Following A. Mitchell Innes, however, MMT acknowledges some similarities between sovereign and non-sovereign issues of liabilities, and hence integrates a credit theory of money (or, “endogenous money theory,” as it is usually termed by post-Keynesians) with state money theory. MMT uses this integration in policy analysis to address issues such as exchange rate regimes, full employment policy, financial and economic stability, and the current challenges facing modern economies: rising inequality, climate change, aging of the population, tendency toward secular stagnation, and uneven development. This paper will focus on the development of the “Kansas City” approach to MMT at the University of Missouri–Kansas City (UMKC) and the Levy Economics Institute of Bard College.

El proceso de acumulación financiera y la capacidad de endeudamiento en el ciclo financiero de las corporaciones bursatiles que cotizan en la BMV.

Corporations have reoriented their financing strategies, during the financialization process, to increase their borrowing capacity and es­tablish speculative financial strategies during the financial cycle. The objective of this paper is to analyze the process of financial accumula­tion during the financial cycle and under a context of financialization. The inclusion of the endogenous money theory and the hierarchy in the financing structure allow us to identify the strategies used to accu­mulate financial resources in corporations. The analysis will be carried out using a dynamic econometric model with panel data applied to 26 BMV corporations during the period 2002-2014. In these corporations, the results show that the indebtedness behavior is cumulative and is led by the financial cycle.

Is shadow banking really akin to banking? A critical analysis in light of monetary theory

This paper purports to show that a very specific theory of money underlies the way in which shadow banking is understood by most economists as well as the regulatory changes that arises from their understanding of the phenomenon. It demonstrates that the “shadow banking” metaphor implicitly relies on an erroneous conception of banking according to which banks are mere intermediaries of loanable funds. An alternative conception of shadow banking is proposed, based on the theory of endogenous money, where banks play a unique and very special role. The paper provides another comprehension of the purpose of the shadow banking system within the overall financial system, which leads to quite different regulatory proposals.

A criteria-based approach to the description of endogeneity and exogeneity of money

A criteria-based approach to the description of endogeneity and exogeneity of money

Self-fulfilling runs and endogenous liquidity creation

This paper incorporates endogenous money creation into the liquidity mismatch problem of Diamond and Dybvig (1983). We characterize a nominal economy where demandable deposits are created through lending. Depositors use sight deposits to buy consumption goods and the banks manage reserves to clear payments and to offset liquidity risk. We show that deposit contracts are suboptimal in terms of liquidity risk-sharing. We also observe that self-fulfilling runs depend on the refinancing rate of the central bank. Our analysis emphasizes the importance of effective lender of last resort policies to prevent expectational banking panics.

Endogenous versus exogenous money: Does the debate really matter?

Whether money is exogenous or endogenous is the subject of one of the most important and intriguing debates in monetary economics. The aim of this article is to contribute to this longstanding debate through detailed examination of different notions of endogeneity and exogeneity of money. I argue that the debate has been too simplified. In reality, money can be either endogenous or exogenous, depending on several factors. Not only has the debate prompted some economists to draw too far-reaching conclusions, but it also misses the point.

Money Creation in the Eurozone: An Empirical Assessment of the Endogenous and the Exogenous Money Theories

ABSTRACT The aim of this paper is to strengthen our understanding of the money creation process in the Eurozone for 1999–2016 period, through an empirical assessment of two main monetary theories, namely the (Post Keynesian) endogenous money theory and the (Monetarist) exogenous money theory. By applying a VAR and VECM methodology, we analyse the causal relationship among monetary reserves (or monetary base), bank deposits and bank loans. Our empirical analysis supports several propositions of the Post Keynesian endogenous money theory since (i) bank loans determine bank deposits, and (ii) bank deposits in turn determine monetary reserves.

Analysis of money supply Indonesia: The vector autoregression model approach

Endogenous money is a major component of the Post Keynesian economy. This refers to the theory that the existence of money in an economy is driven by real economic upheaval. In this study examines the effect of macroeconomic variables on the amount of money in circulation in Indonesia during the period of global economic recession in 2008 and 2016. The analytical tool used was the Vector Autoregression (VAR) in the period January 2006 - July 2016. From the results of the study, that the variable Amount Money Supply, BI Rate, Exchange Rates, Government Revenues and Inflation have a long-term cointegration relationship. VAR estimation results in the short run show that M2 and BI Rate have a positive effect on M2 movement, Government Revenues and Inflation have a negative effect on M2.

Lifting the Veil on Interest

The central bank practice which emerged in the period following the financial crisis called into question numerous elements of interest rate considerations. In this paper we present a new theoretical framework that dispenses with the concept of real interest altogether, as a vague and unnecessary category both in policy judgements and business decisions. This approach breaks with the traditional theory of economics. Traditional macroeconomics places its argumentation in the context of real analysis, which hinders the understanding of economic processes. Schumpeter and subsequently, Keynes took a stand against this approach and, rebuffing the real approach, turned to monetary analysis as early as a century ago. In the framework of the classical theory of economics, they describe monetary policy as an adjustment to the natural rate of interest. In this article we propose a different approach. Describing the role of fiat money, the endogenous money theory puts the lending activity of commercial banks into the focus of money creation. This concept also put central bank monetary policy in a new framework. According to this approach, central banks assume an exclusive role in determining the interest rates, but the central significance of the interest rate policy weakens. Once we recognise the crucial role of commercial banks in money creation, the role and function of the central bank changes. The central bank no longer controls money creation solely by shaping the interest rate policy, but also by way of the micro and macroprudential regulation of lending.

Post‐Keynesian endogenous money theory: Horizontalists, structuralists and the paradox of illiquidity

AbstractThe paper aims to provide a theoretical advancement in the post‐Keynesian debate between horizontalists and structuralists by offering an additional theoretical support to the horizontalist view. Through the newly introduced notion of paradox of illiquidity, a critique to the endogenous money–liquidity preference model is developed, by focusing on the relationship between the volume of loans and the mark‐up. The paradox of illiquidity aims to deny: (a) the idea of a banking sector achieving illiquid position during its lending activities and, consequently, (b) the view of an upward sloping credit supply curve.

Monetary Theory of the Price Level 物価水準の貨幣理論

Japanese version (original): https://ssrn.com/abstract=3429565 Fiscal Theory of the Price Level (FTPL) derives the budget constraint formula of the integrated government which integrates balance sheets of the government and the central bank, and it is a theory that price level fluctuates so that real government debt satisfies budget constraint. This model does not specify the cause of price level fluctuations. Then, this paper proposes a model which clarifies the relation between the mechanism of the fluctuation of the price level and the finance by constructing the mathematical model of tax money theory and endogenous money supply theory which are the basis of Modern Monetary Theory (MMT), and constructing the macro-economic model.

Mobile Money and the Labor Market: Evidence from Developing Countries

Mobile money can play an important role in improving financial inclusion and, as a consequence, employment outcomes, especially in areas where adequate financial infrastructures are lacking. In this paper, we study the effects of mobile money use on the employment outcomes of individuals in 8 developing countries. Our findings indicate that, relative to non-users, individuals who use mobile money are more likely to become self-employed and to receive a regular wage. In particular, the positive association between mobile money use and regular wage is found to be robust also when explicitly addressing the potential endogeneity of mobile money. Overall, the evidence suggests that policies aimed at favoring access to and use of mobile money can provide an effective and relatively inexpensive tool in the agenda for sustainable development.

The process of endogenous liquidity in developing economies: the case of Mexico*

The Post-Keynesian theory of endogenous money is typically used to explain the operations in advanced economies like the US. While the core ideas are relevant for all market economies, developing economies have additional features which complicate the process. These may include: the local currency is not accepted as a means of payment for international transactions, so the banking system (including the central bank) requires foreign currency reserves (balance-of-payments constraint); hard currency reserves are needed to provide ‘credibility’ for circulation of domestic currency; stock and bond markets are not well developed, so other financial instruments are necessary to complete the finance-funding process; and institutional differences regarding monetary control.We use the case of Mexico to show how these features of developing economies can complicate the endogenous-money process. For Mexico the process is constrained by the use of the US dollar as both a store of value and a reserve for the banking system. As a consequence, the interest rate is determined by the demand for the alternative sources of liquidity creation, and therefore a credit-financed expansion will necessitate an increase in the interest rate which can lead to a recession or other crisis scenarios.