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.

How excessive endogenous money supply can contribute to global financial crises

Financial crises have become a challenge for sustainable growth, given the frequency and intensity of crisis shocks and their destructive consequences in recent decades. The paper aims to study how the endogenously generated excess money supply can contribute to global financial crises. The creation of money supply is examined from the perspective of the Quantity Theory of Money (QTM) and endogenous money, namely Horizontalism, Structuralism, and Modern Money Theory. Given that prices are not flexible in the short term, increased volatility in the money market prevents a short-term ready balance between money supply and output. The overall result of money supply accommodation can be unpredictable if monetary authorities and commercial banks do not pool their interests, and the money demand volatility becomes extremely high. The study of the correlation between money supply and output allowed distinguishing between neutral countries in the creation of extra liquid assets and countries that can be a potential trigger for excessive money supply volatility. Monitoring the dynamics of M3 and GDP showed that before the significant crisis periods of 1997–1998, 2007–2008, and 2019–2020, the growth of money supply was more than 8%. The established critical level confirms the potential contribution of endogenously created excess money supply to global financial crises.

Computational Analysis of the Properties of Post-Keynesian Endogenous Money Systems

The debate about whether or not a growth imperative exists in debt-based, interest-bearing monetary systems has not yet been settled. It is the goal of this paper to introduce a new perspective in this discussion. For that purpose, an SFC computational model is constructed that simulates a post-Keynesian endogenous money system without including economic parameters such as production, wages, consumption and savings. The case is made that isolating the monetary system allows for better analysis of the inherent properties of such a system. Loan demands, which are assumed to happen, are the driving force of the model. Simulations can be run in two modes, each based on a different assumption. Either the growth rate of the money stock is assumed to be constant or the loan ratio, expressed as a percentage of the money stock, is assumed to be constant. Simulations with varying parameters were run in order to determine the conditions under which the model converges to stability, which is defined as converging to a bounded debt ratio. The analysis showed that the stability of the model is dependent on net bank profit ratios, expressed relative to their debt assets, remaining below the growth rate of the money stock. Based on these findings, it is argued that the question about the existence of a growth imperative in debt-based, interest-bearing monetary systems needs to be reframed. The question becomes whether a steady-state economy can realistically support such a system without destabilising it. In order to answer this question, the real-world behaviour of economic actors must be included in the model. It was concluded that there are indications that it might not be feasible for a steady-state economy to support a stable debt-based, interest-bearing monetary system without strong interventions. However, more research is necessary for a definite answer. Real-world observable data should be analysed through the lens of the presented model to bring more clarity.

Computational Analysis of the Properties of Post-Keynesian Endogenous Money Systems

“Money has always been something of an embarrassment to economic theory. Everyone agrees that it isimportant; indeed, much of macroeconomic policy discussion makes no sense without reference to money.Yet, for the most part theory fails to provide a good account for it.”(Banerjee and Maskin, 1996, p. 955)The debate about whether or not a growth imperative exists in debt based, interest bearing mone-tary systems has not yet been settled. It is the goal of this paper to introduce a new perspective inthis discussion.For that purpose an SFC computational model is constructed which simulates a post KeynesianEndogenous Money system without including economic parameters such as production, wages,consumption and savings. A case is made that isolating the monetary system allows for betteranalysis of the inherent properties of such a system.Loan demands, which are assumed to happen, are the driving force of the model. Simulationscan be run in 2 modes, each based on a different assumption. Either the growth rate of the moneystock is assumed to be constant or the loan rate, expressed as a percentage of the money stock, isconsidered to be constant.Simualtions with varying parameters are run in order to determine the conditions under whichthe model converges to stability, which is defined as converging to a bounded debt rate.The analysis shows that stability of the model is dependent on net bank profit ratios, expressedrelative to their debt assets, remaining below the growth rate of the money stock. Based on thesefindings it is argued that the question about the existence of a growth imperative in debt based,interest bearing monetary systems needs to be reframed. The question becomes whether a steadystate economy can support such a system without destabilizing it.It is concluded that there are indications that this might not be the case. However, for a definiteanswer more research is necessary. Real world observable data should be analysed through thelens of the presented model to bring more clarity.

Institutions, Liquidity Preference, and Reserve Asset Holding in the Eurozone Core and Periphery Before and After Crises: Some Stylized Facts

The monetary integration of the Eurozone initially accommodated endogenous money creation across its members; however, liquidity crises that followed the Global Financial Crisis (GFC) revealed structural disparities in liquidity provision in response to funding crises. By refusing to act as a lender of last resort, the European Central Bank pushed governments across the Eurozone to guarantee domestic financial liabilities. The importance of repurchase agreements to fund Eurozone banking and the predominance of European government bonds in general collateral left peripheral governments vulnerable to decreased private demand for their debt, and financially constrained by private intermediaries’ refusal of peripheral sovereign bonds in general collateral. This constraint created accelerated the sovereign debt crises driving the Eurozone crisis. This paper analyzes Eurozone banks’, National Central Banks’, and governments’ balance sheets to show how they have internalized the lessons from the GFC. We find that these entities have returned to holding larger concentrations of reserve assets, a practice that some architects of the Eurozone had hoped monetary integration at the supranational level would end. As Eurozone governments consider how to respond to the Covid-19 pandemic, liquidity crunches that hurt financial and fiscal activity across the Eurozone remain a risk.

The economics of Basil Moore: slow progress toward horizontalism

While Basil Moore is well known for his view on endogenous money, very little is known about how he got there, and how his views might have evolved through time. This paper examines Moore's early views, pre-Horizontalists and Verticalists, and explains how Moore's views are rooted in a traditional Keynesian Tobin approach. But Moore's sabbatical at the University of Cambridge in 1970, when he met Paul Davidson and Joan Robinson, changed all that. Yet it would take him a full decade to fully embrace endogenous money.