Money multiplier in the context of modern views on money creation: theory and facts

2018 ◽  
pp. 50-69 ◽  
Author(s):  
V. O. Grishchenko
Keyword(s):  
Bank Lending ◽  
Central Banks ◽  
Financial Systems ◽  
Balance Sheets ◽  
Var Analysis ◽  
Money Multiplier ◽  
Long Period ◽  
Money Creation ◽  
Bank Reserves

For a long period of time, multiple money expansion has been regarded empirically proven. Nevertheless, in recent decades it has been widely disputed, particularly in the publications of central banks and those of the BIS. In this paper we show that multiple money expansion is characteristic of underdeveloped financial systems. In the era of multiple money expansion the volume of lending was limited by the supply of bank reserves. Today, however, the main constraint is the demand for credit. This is supported by our analysis of banks’ balance sheets as well as VAR analysis of factors of bank lending in Russia in 2005—2017.

A Generalized Exposition of Money Creation in the Money and Banking Course

2019 ◽  
Vol 65 (2) ◽  
pp. 244-263
Author(s):  
Eran Guse ◽  
David W. Brasfield
Keyword(s):  
Production Function ◽  
Great Recession ◽  
Central Banks ◽  
Jel Classification ◽  
The Great Recession ◽  
Exogenous Shocks ◽  
Money Multiplier ◽  
Money Creation ◽  
Money Production ◽  
Standard Production

Since the Great Recession, monetary policy conducted by the U.S. Federal Reserve and other central banks has changed. However, the discussion regarding money creation and the money multiplier has not been altered in undergraduate money and banking textbooks. We suggest a change to the presentation of money creation by first removing the use of T-accounts and replacing them with a visual representation known as the money production diagram. We then present a money production function that is much like a standard production function as described in principles courses. The money multiplier is replaced by the average product of the monetary base in this production function. We use this production function to explain changes to the money supply from exogenous shocks or changes to policy. JEL classification: A22, E51, E52

scholarly journals The theory of endogenous money and the LM schedule: prelude to a reconstruction of ISLM

2017 ◽  
Vol 37 (1) ◽  
pp. 3-22 ◽  
Author(s):  
THOMAS I. PALLEY
Keyword(s):  
Interest Rates ◽  
Money Supply ◽  
Bank Lending ◽  
Macroeconomic Theory ◽  
Preference Theory ◽  
Money Multiplier ◽  
Keynesian Theory ◽  
Money Economy ◽  
Endogenous Money ◽  
Money Creation

ABSTRACT Money is at the center of macroeconomics, which makes understanding the money supply central for macroeconomic theory. This paper presents the Post Keynesian theory of endogenous money supply and shows how it is fundamentally different from the conventional money supply theory. The conventional approach relies on the money multiplier and bank lending is invisible. Post Keynesian theory discards the money multiplier and focuses on bank lending which drives money creation. The paper emphasizes the structuralist version of Post Keynesian theory which retains Keynes’ liquidity preference theory of long term interest rates and also recognizes banks are subject to financial constraints that limit their lending activities. The paper then shows how to derive the LM schedule in an endogenous money economy, which is a necessary prelude to reconstructing the ISLM model.

scholarly journals On the money creation approach to banking

2021 ◽  
Author(s):  
Salomon Faure ◽  
Hans Gersbach
Keyword(s):  
Monetary Policy ◽  
Commercial Banks ◽  
Central Banks ◽  
Capital Regulation ◽  
Bank Deposits ◽  
Central Bank Money ◽  
Money Creation ◽  
Asset Purchases ◽  
Bank Equity ◽  
Bank Money

AbstractWe study today’s two-tier money creation and destruction system: Commercial banks create bank deposits (privately created money) through loans to firms or asset purchases from the private sector. Bank deposits are destroyed when households buy bank equity or when firms repay loans. Central banks create electronic central bank money (publicly created money or reserves) through loans to commercial banks. In a simple general equilibrium setting, we show that symmetric equilibria yield the first-best level of money creation and lending when prices are flexible, regardless of monetary policy and capital regulation. When prices are rigid, we identify the circumstances in which money creation is excessive or breaks down and the ones in which an adequate combination of monetary policy and capital regulation can restore efficiency. Finally, we provide a series of extensions and generalizations of the results.

Money creation, debt, and justice

2021 ◽  
pp. 1470594X2199973
Author(s):  
Peter Dietsch
Keyword(s):  
Commercial Banks ◽  
Central Banks ◽  
Private Bank ◽  
Access To Credit ◽  
Financial Architecture ◽  
Theories Of Justice ◽  
Money Creation ◽  
The Creation ◽  
Interbank Lending ◽  
Alternative Designs

Theories of justice rely on a variety of criteria to determine what social arrangements should be considered just. For most theories, the distribution of financial resources matters. However, they take the existence of money as a given and tend to ignore the way in which the creation of money impacts distributive justice. Those with access to collateral are favoured in the creation of credit or debt, which represents the main form of money today. Appealing to the idea that access to credit confers freedom, and that inequalities in this freedom are morally arbitrary, this article shows how the advantage to those with collateral plays out in different ways in today’s economy. The article identifies several forms of bias inherent in money creation, and its subsequent destruction: loans from commercial banks to individuals and corporations, interbank lending, lending from central banks to commercial banks, and selective bail-outs by central banks. These are not mere inequalities: they are unjust since alternative designs of the financial architecture exist that would significantly reduce them. The paper focuses on one possible reform with the potential to address several of the types of bias identified, namely the separation of money creation from private bank credit.

scholarly journals Securitization of (bad) loans to Italian SMES: The role of the public guarantee

2021 ◽  
Vol 16 (4) ◽  
pp. 193-208
Author(s):  
Lucilla Bittucci ◽  
Stefano Marzioni ◽  
Pina Murè ◽  
Marco Spallone
Keyword(s):  
Financial Stability ◽  
Positive Impact ◽  
Central Banks ◽  
General Purpose ◽  
Recent Past ◽  
Balance Sheets ◽  
Access To Credit ◽  
The Public ◽  
Main Factors

This study investigates the main factors driving the evolution of the securitization of loans to Italian small and medium-sized enterprises (SMEs). The value of securitization increased in last two years, even though it has not been used as collateral for central banks. The disposal of non-performing loans (NPLs) may have been rather triggered by increasing attention of the international institutions to such an issue, within the general purpose of financial stability. The purpose of this paper is to interpret such a phenomenon focusing on Italian banks and restricting the analysis to the case of securitizations backed with loans to small and medium-sized enterprises (SMEs). The interesting result that emerges, supported by econometrically tested empirical evidence, is that given the orientation of international financial institutions, such as the ECB and the EBA, and reacting to incentives coming from the fiscal policy authorities for the public guarantee of loans, banks have been using securitization to reduce the burden on their bad balance sheets due to (NPLs). It was found that the public guarantee had a positive impact on SME securitization, whereas securitization in other sectors has not been affected significantly. Such evidence suggests that, in the absence of a public guarantee, the financial stability target would have been at risk, and the effectiveness of collateral-based policies in the recent past must be improved to enhance access to credit for SMEs.

Money creation in the modern economy: an appraisal

2021 ◽  
Vol 9 (1) ◽  
pp. 43-60
Author(s):  
Jacob Stevens ◽  
Keyword(s):  
Central Bank ◽  
Money Supply ◽  
Central Banks ◽  
Quantitative Easing ◽  
Digital Currency ◽  
Modern Economy ◽  
Money Creation ◽  
Floor System ◽  
Selection Of

This paper models a representative bank, and uses this model to explore the assumptions and implications of a selection of money-creation theories. It is shown that the money-supply process tends toward the logic of exogeneity as banks' fears about liquidity stress increases. At present, banks do not fear liquidity stress because central banks are operating under a floor system with a superabundance of reserves following unsterilized quantitative easing. Secondly, a role for a ‘central-bank digital currency’ is suggested as a useful complement to reserves policy in an economy with large or collusive banks.

Regulation and Regulators, 1993–2006

2020 ◽  
pp. 267-297
Author(s):  
Ranald C. Michie
Keyword(s):  
Financial Markets ◽  
Central Banks ◽  
Data Handling ◽  
Financial Systems ◽  
Settlement Systems ◽  
The Face ◽  
Implicit Belief ◽  
National Boundaries ◽  
Financial Transactions

By the 1990s the combination of internal deregulation and globalization led to a spectacular growth in the value of financial transactions both inside countries and across borders. There was a commensurate increase in pressure on payment and settlement systems to cope with the huge volume and variety of transactions. All this was of concern to those who regulated financial systems around the world. The speed and extent of the changes taking place, assisted by the advances made in the technology of communication and data handling, forced regulators to search for new ways of coping with the consequences, as the methods of the past were becoming inadequate. Globalization meant that national boundaries could no longer define the parameters within which financial systems operated, as all became integrated into international flows of short-term money and long-term finance. The complexities arose not only from the process of globalization and technological change but also from the disappearance of the barriers that had long separated different components within national financial systems. Rather than serving separate communities banks and financial markets increasingly competed with each other. In the face of these enormous changes regulators turned to the megabanks as a safe and secure way of monitoring and policing global financial markets. There was an implicit belief that the size and sophistication of these megabanks had made them to big to fail or even require the central banks to play a role as lenders of last resort.

Can Consolidated Supervision Deter Shadow Banking?

2016 ◽  
pp. 30-45
Author(s):  
Rituparna Das ◽  
Harish C. Chandan
Keyword(s):  
North America ◽  
Central Banks ◽  
Shadow Banking ◽  
Financial Systems ◽  
Regulatory Arbitrage

This chapter analyzes the business of shadow banking practiced by non banking financial companies that are subsidiaries of bank-groups or conglomerates across the continents. The central banks want to stop shadow banking because it has hidden regulatory arbitrage in it that can create distortions and additional risks to the financial systems. Three countries - one each from Belgium in Europe, Canada in North America and China in Asia in addition to USA and UK along with India are taken as cases in this chapter. This chapter inquires into whether consolidated supervision can work as a way out of the problem of shadow banking.

Sign in / Sign up

Export Citation Format

Share Document