Exogenous Money Research Articles

Monetary transmission and government investment in China

The quantity measure of money supply—the M2 growth, in particular—has been used as the intermediate target of monetary policy in China since 2000. We document three findings on the transmission of money supply shocks to firm investment and financing over the period from 1998 to 2016. First, positive money supply shocks have significant negative effects on firm investment and do not have consistent impacts on firm financing, contradicting the standard monetary transmission mechanism. Second, using short-term global capital flows as an exogenous money supply factor, we recover the standard positive effect of money supply shocks on firm investment and financing, suggesting that M2 growth contains confounding factors and it is inappropriate to use it directly as an intermediate target or indicator of monetary policy. Third, we show that removing the government investment-related component from M2 growth leads to a monetary supply measure that conforms to the standard monetary transmission mechanism. Overall, we argue that our refined measure of M2 growth can serve as a superior indicator for the intermediate target of monetary policy in China.

Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance

<p>Many of Keynes´s ideas and concepts are proven correct in this paper. The demand side, mainly business investments, drives the economy. Business firms steer the business cycle via profit expectations and animal spirits. Injections to and withdrawals from the circular flow of income are multiplied throughout the economy in accordance with Keynes´s multiplier. A sudden and sharp rise in households´ saving rates has a detrimental effect on aggregate demand, in line with Keynes´s paradox of thrift. Finance, not saving in the S=I sense, is the necessary condition for business investments and economic growth to be realized. Keynes´s finance motive thus makes money endogenous, contradicting the textbook result that exogenous money steers aggregate demand, contradicting the mainstream loanable funds theory and putting into question the Keynesian theory of sticky prices as a condition for real growth. However, a crucial omission in Keynes´s productive writings is the lack of an accelerator tying income to investment. Some of his followers such as Paul Samuelson tried to remedy that by developing multiplier-accelerator models. The problem with them is that the accelerator lacks micro foundations, in specific disregarding business confidence. Linking macro accounting identities with empirical national accounts data for five major economies produces the finding that business firms explain more than all aggregate expenditure growth during a 25-year period. Thus, it is concluded that business confidence is the root of the business cycle. Making the accelerator account for business confidence casts new light on the perhaps most well-known Keynesian “truth”: active fiscal policy as a main force stabilizing the business cycle. With business confidence being the endogenous and ubiquitous variable driving the business cycle, it turns out that any exogenous factor has the possibility to affect it. Policy needs to be viewed as a competing factor to the factor(s) driving the cycle in the other, destabilizing direction. The more powerful those factors are (e.g., a deadly virus), the tougher it gets for policy to “win” the competition, turning business confidence around. This leads up to the paper´s main conclusion: the worse the economy, the stronger is the case for active fiscal policy, but the lesser is the chance for it to succeed.</p>

Dinero endógeno y exógeno en la nueva macroeconomía keynesiana: un análisis teórico comparativo.

Dinero endógeno y exógeno en la nueva macroeconomía keynesiana: un análisis teórico comparativo.

Денежное предложение в истории макроэкономической мысли: 50 оттенков эндогенности

The paper considers the evolution of the money supply concept in economics through the lens of contemporary discussion on the degree of its endogeneity. It is stated that the model of exogenous money supply formation, widespread in the literature and actively criticized in recent decades, is an artifact of macroeconomic thought. Its dominance lasted a very short time period, and various forms of endogeneity were attributed to money supply much more often in the course of monetary theory development. Authors cover the debates between the currency and banking school in the XIX century, the birth of the theory of money multiplier, Keynes’ position, the monetarist view of money supply and its criticism by Post- Keynesians. Particular attention is paid to the turn in views within the mainstream, from the Real Business Cycles doctrine to state-of-the-art models of the New Synthesis. It is emphasized that the complete exogeneity of money supply is a distinctive feature only of the monetarist approach, which has relied on the specifi c assumption of the stability of money demand function. The paper shows that, despite the visible convergence between the New Keynesian and Post- Keynesian positions, based on the modeling of interest rate targeting rather than money supply targeting by the central bank, fundamental differences still remain between two camps regarding the endogeneity mechanism.

A reappraisal of the Friedman-Kaldor debate in the light of the great recession

This paper summarizes the arguments and counterarguments within the scientific discussion on the issue of the exogenous and endogenous money supply theories, developed by Milton Friedman and Nicholas Kaldor in the 1960s-1970s. The main purpose of the research is to demonstrate that the influence of the monetarist exogenous money supply theory has become low and that the influence of the Post-Keynesian endogenous money supply theory has become strong during the last decades. Systematization of the literary sources and approaches for solving the problem indicates that Friedman’s metaphor has been deeply twisted from its original sense and is now interpreted as a fiscal policy rather than a monetary option; while hard-line monetarism never triumphed in central banks, Kaldor’s endogenous money supply theory has gained ground at the same time. Investigation of the topic in the paper is carried out in the following logical sequence: an analysis of the Friedman-Kaldor debate of 1969-1970; a demonstration of Friedman’s metaphor of the helicopter money was strong after this debate; a demonstration that Friedman’s metaphor was linked to fiscal policy rather than to monetary policy and is therefore a weak metaphor; a demonstration that Kaldor’s endogenous money supply theory gained ground within the main European central banks from the 1940s: in French, English and German monetary authorities. Methodological tools of the research methods were the primary sources of the main central banks ((Federal Reserve System, Bank of France, Bank of England, German Bundesbank, Committee of the Governors of the central banks of the European Economic Commission, Bank of International Settlements). The research empirically confirms and theoretically proves that Nicholas Kaldor finally won the debate and that the Post-Keynesian framework is more efficient to understand the functioning of monetary policies, especially the monetary creation process. The results of the research can be useful for all researchers working on the monetary creation process and on monetary theories and policies.

ISLAMIC ENDOGENOUS MONEY: EVIDENCE FROM ISLAMIC BANKING SYSTEM IN INDONESIA AND MALAYSIA

This research is conducted due to the un-ware contemporary Muslim economists on the feature of money whether exogenous or endogenous. Arguing that money in Islam should be endogenous, Choudhury (1997) asserts that fiat and fractional reserve systems makes money exogenous. If it is true, this condition leads to the un-oriented development of Islamic monetary and financial systems that are basically is fiat and fractional reserve systems. Accordingly, the empirical studies on Islamic monetary policy in Islamic financial system that is based on exogenous money concept cannot reveal the true money supply for the economy. This paper aims to propose the theoretical model of endogenous Islamic money and conduct an empirical study of the model on Islamic banking that is based on fiat and fractional reserve systems. The empirical method used is based on the ARDL and ECM. The result of the research gives evidence that the profit and loss sharing system is a core feature of the Islamic endogenous money system in the fractional reserve requirement system. Other evidence reveals that the development of the Islamic financial system can minimize the existence of exogenous money in a fiat monetary system. By these results, this study argues that Islamic endogenous money system can be developed in fiat and fractional reserve banking systems through the profit and loss sharing systems.

Reconstructing Marx’s Theory of Credit and Payment Crises under Simple Circulation

ABSTRACT There is general agreement amongst scholars of Marx that his monetary theory is incomplete, especially in his most detailed writings on credit in the third volume of Capital. Moreover, in these unfinished notes Marx takes sides with the banking school approach, notable for its opacity compared to the clear axioms of its currency school counterpart. A reconstruction is proposed based on Marx’s step-by-step method, commencing with a critique of Say’s Law under simple commodity circulation, these foundations formalised here using the model of pure labour developed by Pasinetti (1993). Piecing together the fragments, and filling in some of the gaps in Marx’s writings on money, the analysis builds from commodity money and private debt contracts, to the modelling of pure credit and pure banking systems. Adapting the Pasinetti model of a real economy, its endogenous money requirements provide an alternative to the exogenous money approach of the currency school: a streamlined analytical core to the banking school approach, as interpreted by Marx. In addition, the structure of payment crises — as an extension of Marx’s possibility theory of crises — is examined with money as a means of payment required to settle debts between producers and the banking system.

Crisis and the Role of Money in the Real and Financial Economies—An Innovative Approach to Monetary Stimulus

‘Financial crisis’ is sometimes regarded as synonymous with ‘economic crisis’, but this is an oversimplification and risks missing the feedback loops between the financial and real economies. In this paper, the role of money is revisited in the context of distinguishing the real economy from the financial economy. A theoretical framework is developed to explain how endogenous (bank credit) and central bank exogenous (quantitative easing, QE) money creation feed into the real and financial economies. It looks at how the velocity of monetary circulation varies between the two economies and across asset types within the financial economy. Monetary transmission mechanisms are set into a framework that helps explain how QE stimulus risks combining asset price bubbles with poor growth in the real economy. The real economy transmission mechanism of ‘helicopter money’ is given context, enabling an assessment of the efficacy of both the QE and helicopter money policy routes. Finally, we present a new type of monetary transmission, ‘Smart Helicopter Money’, to deliver monetary stimulus to innovators, SMEs and high-growth firms via both complementary currencies and a modified form of QE in order to achieve proportionally greater impact on the real economy.

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

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.

The money creation process: A theoretical and empirical analysis for the United States

AbstractThe aim of this paper is to assess—on both theoretical and empirical grounds—the two main views regarding the money creation process, namely the endogenous and exogenous money approaches. After analysing the main issues and the related empirical literature, we will apply a vector autoregression model and a vector error‐correction model methodology to the United States for the period 1959–2017 to assess the causal relationship between a number of critical variables that are supposed to determine the money supply, that is, the monetary base, bank deposits, bank loans and the nominal level of economic activity. The empirical analysis supports several propositions related to the endogenous money approach. In particular, it shows that for the United States in the years 1959–2017 (a) bank loans determine bank deposits and (b) bank deposits in turn determine the monetary base. Our conclusion is that money supply is mainly determined endogenously by the lending activity of commercial banks and the nominal level of economic activity.

12. La théorie économique dominante a-t-elle évolué depuis la crise ?

La crise de 2007 a produit des effets ambivalents sur le courant dominant en sciences économiques. L’histoire économique est mieux valorisée, plusieurs banques centrales ont désavoué la conception de la monnaie exogène et les modèles macroéconomiques à agent représentatif (DSGE) ont fait l’objet de nombreuses critiques. Mais ces derniers ne sont pas abandonnés pour autant. En outre, le cœur de la théorie néo-classique, la microéconomie, n’a pas vraiment été influencé par la crise, si ce n’est par le renforcement des approches « comportementalistes » remettant en cause l’hypothèse de rationalité.

An empirical procedure to evaluate monetary management under exogenous changes in the money supply

ABSTRACTThis article proposes an empirical procedure to evaluate central banks’ monetary management in a presence of exogenous changes in the money supply. Monetary shocks deviate the market interest rate from the target, and the monetary authority decides its optimal intervention in the money market, bearing in mind the benefits and costs of re-establishing its target interest rate. According to monetary management theory, typically a central bank will allow for variation in the interest rate within a range around the target interest rate, thereby intervening in the money market when the interest rate trends toward a point outside that range. In this context, we develop an empirical strategy to analyse central bank’s reactions to exogenous money changes by making a statistical comparison of the actual and the estimated intraday shift in the money supply. We also employ our method to test the reactions of the Brazilian Central Bank to liquidity shifts caused by changes in the Treasury Single Account (TSA) balance. Using different metrics of analysis, the applications of our procedure confirms the predictions of the optimal monetary management theory.

Money and generalized exchange: A critical look at Neo-Walrasian theory

The proof of existence of market clearing equilibrium is the cornerstone of Neo-Classical theory. While it is generally portrayed as a barter framework, the proof actually assumes an accepted system of credits and debits; a system of privately issued IOU's, or what is the same thing commitments by private agents to deliver a certain quantity of a given commodity at a given equilibrium price. In other words, the proof presupposes the existence of ‘inside money’. Yet a system of generalized exchange with pure inside money is not compatible with the main principles of Neo-Classical monetary theory including that inflation is always and everywhere a monetary phenomenon, the exogeneity of money and also the neutrality of money. This explains the importance and necessity of introducing ‘outside money’ in general equilibrium. Focussing mainly on Patinkin's ‘invalid dichotomy’ and the real balance effect, and to a lesser extent, on overlapping generation models, I try to show that these attempts have been unsuccessful. In both cases the integration of monetary and value theory amount to collapsing all individuals into a single one. This negates the very economic problem (i.e., multiple exchanges) that gave rise to general equilibrium theory and to the impending requirement to prove the existence of market clearing equilibrium.

Mundell–Fleming without the LM curve: the exogenous interest rate in an open economy

In this paper we evaluate critically the popular Mundell–Fleming model from the heterodox standpoint of the exogenous interest-rate approach. We criticize the assumptions of exogenous money supply, ‘perfect’ international capital markets and inelastic exchange-rate expectations. We show that in a more realistic framework none of the main results of the Mundell–Fleming model on the relative effectiveness of fiscal and monetary policies is valid, either in floating and fixed exchange-rate regimes. We conclude that, within certain very asymmetric bounds, the Central Bank has the power to determine the domestic interest rate exogenously even in open economy with free capital mobility and that there is no automatic market mechanism to ensure the automatic adjustment of the interest rate and exchange rate to sustainable levels.

MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY

The limited asset-market participation hypothesis has triggered a debate on DSGE models' determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate in the market for interest-bearing securities hold money. In this case, endogenous monetary transfers between the two groups make it possible to smooth consumption differences, and the model is determinate, provided that the non-negativity constraint on individual money holdings is satisfied.

Econophysics: Comments on a Few Applications, Successes, Methods and Models

For this special issue, the article aims at discussing a few econophysics problems studied so far rather successfully. The following ‘applications’ in micro-econophysics are considered: (i) financial crashes; it is emphasized that one can distinguish between endogenous and exogenous causes; (ii) portofolio control, selection and inherent risk measure; (iii) foreign currency exchanges, also distinguishing endogenous and exogenous money control; (iv) price and asset evolution values. It is shown that some macro-econo-physics problems have been also tackled, like geographic/ political constraints, the globalization of the economy and country clustering. Moreover, it is daring to suggest prospect for studies and researches, whence presenting some selection of a few interesting perspectives.

Keynes's theories of money and banking in the <i>Treatise</i> and <i>The General Theory</i>

This paper identifies what seem to have been the five main issues in contention in monetary theory, both historically and in the current era, and discusses the view that J.M. Keynes took on each of them in the Treatise on Money and The General Theory. The key issues in monetary theory are the ontology of money, endogenous versus exogenous money, interest-rate determination, the choice of the monetary policy instrument, and the neutrality versus non-neutrality of money.

The effectiveness of government debt for demand management: Sensitivity to monetary policy rules

We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lump-sum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary.