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.     

Monetary transmission with multiple policy rates: evidence from Turkey

Quantitative easing policies have led to persistent divergence between officially announced policy rates and short-term money market rates in many economies, making it challenging to assess the stance of monetary policy in the aftermath of the global financial crisis. Lack of data variation in short-term interest rates across time dimension has made it difficult to identify the monetary transmission mechanisms. In order to shed some light on this topic, we make advantage of a specific period from Turkey during which the central bank deliberately allowed the policy rates to diverge frequently from the interbank rates due to capital flow management purposes. Using bank-level flow data from this episode, we investigate the relationship between various short-term interest rate measures and bank loan/deposit rates through panel estimation methods. Our findings suggest that interbank rates are more relevant than central bank’s officially announced rates for the transmission of monetary policy when the two diverge from each other persistently. Interbank rates particularly play a key role in the pricing of loans and deposits. These findings provide helpful guidance for evaluating the monetary stance under unconventional policies.     

The Politics of Shadow Money: Security Structures,Money Creation and Unconventional Central Banking

ABSTRACT

For the first time in the history of central banks, the Federal Reserve has been pursuing monetary policies which allow shadow banks to access its reserves. The paper examines these policies in an analysis based on the concept of security structure. The aim is to facilitate a better understanding of complex institutional arrangements which convert credit claims into money or enable them to simulate the money-form. As the financial crisis reached its peak in September 2008, the Fed was not able to contain the impact precisely because the security structure existing between banks and the Fed did not extend to the shadow banking system, which had meanwhile become thebackbone of the global financial system. To address this situation, the Fed initiated new security structures that were designed to also give players in the shadow banking system access to liquidity and collateral. The concept ‘security structure’ serves as an analytical tool to explore dynamic forms of safety and liquidity generation and to distinguish between credit expansion and money creation. It also helps to differentiate between three qualitatively different stages of security: central bank money, quasi-money and shadow money. In this way, it foregrounds the politics of (shadow) money creation.     

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

This 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.     

POLONIA dynamics during the years 2006–2012 and the effectiveness of the monetary Policy of the National Bank of Poland

In the study we investigate the effectiveness of the National Bank of Poland in counteracting the negative results of the financial crisis in the Polish interbank market. The situation was exceptional in a sense, that during the period of the financial crisis the Polish interbank market experienced liquidity surplus, and the main problem of the central bank was to regain confidence among commercial banks and stimulate interbank transactions. We concentrate on the spread between the rate of overnight interbank loans and the reference rate and based upon its dynamics we assess the monetary policy of the Polish central bank. Using econometric techniques we study how the central bank influenced the spread, when its control over it weakened and when was it strengthened. The study is supported by the results of the survey directed to the headquarters of commercial banks. We conclude that the ability of the central bank to control overnight rate was temporarily lost during the first phases of the financial crisis, but gradually regained after implementation of the confidence pact.     

Monetary policy on interest rates: a retrospective analysis since Thornton

Abstract

In response to the affirmation by certain authors and critics of a recent return to an interest-rate policy that, in their opinion, resembles a throwback to the nineteenth century theory of monetary policy on interest rates, I pose the question of the difficulties of interest-rate policy in a retrospective analysis beginning with the current that founded the short-term interest rate policy within classical analysis and by focusing my discussion on several key authors (Thornton, Banking School, Bagehot, Wicksell, Keynes, contemporary authors such as Woodford). To this end, I study the importance that the interbank money market plays for these authors, which determines the target rate for the central bank.     

内生货币体系下房价波动对货币供求的冲击

在内生货币体系下,房价上涨导致我国内生货币扩张的途径主要有两条:一是基于房地产抵押信贷需求膨胀引致的商业银行内生货币供给的扩张;二是被房价持续上涨及人民币升值预期所吸引的外汇流入导致央行大量基础货币的被动投放。这样会对货币供应量目标有效性带来影响。因此应将房地产市场监测数据列入当前货币供应量调控的参照指标。     

Asset-based Reserve Requirements: Some Reservations

Abstract

Thomas Palley's (2004) paper ‘Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability’ has radical implications for monetary policy and the operations of central banks in the money markets. This comment argues that Palley's proposal may be impractical today because it overlooks banks' holding of excessive reserves (or claims on such reserves), and because reserves allocated for particular kinds of business cannot be isolated in bank balance sheets or markets. In particular, once differential reserves are imposed on particular kinds of business, banks may respond to changes in reserve requirements by varying their assets in less predictable ways than the scheme suggests. A central bank's willingness to use differential reserve requirements will be inhibited by the current policy doctrine that emphasises control of a stable money market rate of interest. In any case, it is doubtful if interest rates or reserve requirements could have the specific targeted effects that Palley's model suggests.     

关于货币内生、外生问题的一般理论

货币内生性和货币外生性都是存在的,只是二者的出现分别需要具备一定的条件。货币的内生、外生取决于两方面行为主体的情况:货币需求者和中央银行的经济情况。货币需求者方面的货币内生性取决于货币需求者能否通过货币市场、货币乘数、基础货币满足交易货币。中央银行方面的货币外生性取决于两个方面:第一,中央银行能否控制货币供给;第二,货币供给改变以后能否改变货币需求。当经济由扩张转为收缩,或由收缩转为扩张,货币的内生、外生会有不同的表现,包括对称的货币内生、对称的货币外生以及不对称的各种情况。     

A two-pillar DSGE monetary policy model for the euro area

The current financial crisis has revived the interest for monitoring both monetary and credit developments. Over the past two decades, consistent with the adoption of inflation targeting strategies by a growing number of central banks and the development of New Keynesian models for which monetary aggregates are largely irrelevant, money and credit have been progressively neglected in the conduct of monetary policy. A striking exception has been the Eurosystem, which has implemented a strategy known as the “two-pillar monetary policy strategy” giving a prominent role for money. In this paper, we develop a small optimizing model based on Ireland (2004), estimated on euro area data and featuring this two-pillar strategy. We evaluate an ECB-style cross-checking policy rule in a DSGE model with real balance effects of money. We find some evidence that indeed money plays a non-trivial role in explaining the euro area business cycle. This provides a rationale for the central bank to factor in monetary developments but also raises some issues regarding the reliability of M3 as an appropriate monetary indicator. We find some evidence that the ECB has systematically reacted to a filtered measure of money growth but weak evidence it has reacted more aggressively during excess money growth periods.     

The ‘compensation’ thesis,as exemplified by the case of the Chinese central bank

This paper extends the theory of demand-led money supply endogeneity to the case of an open economy with a fixed exchange rate. This theory is contrasted to the standard Mundell-Fleming view. In the compensation approach advocated here, central banks are able to set interest rates, even in a fixed exchange rate regime, either because there are automatic market mechanisms that will induce the private sector to act in such a way that changes in foreign reserves will be compensated by opposite changes in central bank claims over the domestic economy, or because the central bank will engage in endogenous sterilization operations in its efforts to enforce its benchmark interest rate. Analyzing the balance sheet of the Chinese central bank, we find that the large rise in foreign reserves on the asset side is compensated by large positive changes in items of the liability side, mainly bonds issued by the central bank. Foreign reserves are not cointegrated with the monetary base, meaning that there is no long-run relationship between foreign exchange reserves and the supply of base money. We also find no long-run relation between foreign exchange reserves and the consumer price index.     

What Do Data Say About Monetary Policy,Bank Liquidity and Bank Risk Taking?

This paper tests empirically the linkage between banks' investment and interbank lending decisions in response to interest rate changes. We draw conclusions for the monetary policy, which uses the interest rate as its main tool. Across European countries we find that the risk-free (i.e. monetary policy) interest rate negatively affects the liquidity retained by banks and the decision of a bank to be a lender in the interbank market. Instead, the interbank interest rate has a positive impact on these decisions. We also find that banks who lend show less risk-taking behaviour and tend to be smaller than those who are borrowers. Most importantly, the risk-free interest rate is positively correlated with loans investment and bank risk-taking behaviour.     

Collateral rehypothecation,safe asset scarcity,and unconventional monetary policy

We build a mark-to-market model where commercial banks can enlarge their balance sheets, repledging the available collateral several times to exchange liquidity through the interbank market. In bad times, the fall of risky asset price disrupts the length of the repledging chain due to the increase of the haircut and the decrease of external assets' value. In such a scenario, the central bank can intervene implementing unconventional monetary policies by purchasing a fraction of the banking system's external assets, both safe treasury bonds, and risky asset-backed securities, to inject liquidity. Our results show that a quantitative easing policy that purchases only safe assets is highly ineffective in restoring the intermediation activity to the pre-crisis level due to its inability to sustain the risky asset price and the repledging chain of collateral. Instead, focusing on risky assets only, the monetary authority can sustain risky asset prices, avoiding the freezing of the money market.     

Money and the ‘Level Playing Field’: The Epistemic Problem of European Financial Market Integration

ABSTRACT

Financial market integration processes in the European Union (EU) are characterised by an epistemic problem of economic theory. This problem encompasses what ‘the market’ is, how it is to be ‘integrated’, and the nature and role of ‘money’ as infrastructure of the fully integrated market. The EU’s legal framework has imported this epistemic problem along with the competitive conception of the market as described in economic theory – as a ‘level playing field’ for private exchange, under free, fair and ideally unrestrained competition. It manifests itself in European financial market integration processes, as exemplified in the article, via two otherwise disconnected areas of European Central Bank (ECB) activity: (a) the provision of central bank credit for the purpose of financial transaction settlement in the Eurozone; and (b) the conduct of ordinary monetary policy in the Eurozone. While the problem can be stabilised through legal, technical and other means, it remains latent, and may manifest itself again in unexpected ways, as happened in the wake of the 2008 financial crisis. Thus, contrary to ideologies that are widely understood as more or less coherent systems of doctrines, epistemic problems are characterised by specific tensions, contradictions and conceptual uncertainties.     

Surplus liquidity,central bank losses and the use of reserve requirements in emerging markets

Since the turn of the millennium, stocks of foreign reserves held by central banks in many emerging markets and developing countries have exceeded currency in circulation. To steer money market rates, these central banks have been absorbing liquidity from, rather than providing it to, the banking sector in their regular monetary policy operations. When interest rates in countries with major reserve currencies are low, the yield on foreign reserves is low. A higher interest rate on liquidity‐absorbing operations may expose central banks to losses. Although a central bank is not a profit‐maximizing institution, central bank losses can undermine the independence of the central bank. Using data for a large panel of central banks, this paper provides some evidence that central banks tend to apply low‐remunerated reserve requirements when profitability is at stake.     

现行国际货币体系与我国货币供给内生性

基于后凯恩斯主义的内生货币供给理论,本文重点从基础货币的角度分析了我国货币供给的内生性,主要结论是:1994年以前,"对金融机构债权"项目的变动是导致我国基础货币投放具有内生性的主要原因,而从1994年开始特别是在2002年以后,则由"国外资产净额"项目即外汇占款的增加主导了我国基础货币的被动投放.进而影响了中央银行对货币供应量的控制能力,使我国货币政策的传导在起点上就缺乏有效性.在现行的国际货币体系下,为减轻货币内生性带来的影响、提高货币政策的有效性,我国应加速人民币国际化进程和建立更具弹性的汇率制度.     

The Collected Works of F.A. Hayek,Vol. 12: The Pure Theory of Capital

This paper discusses the Brazilian financial system and the impact of liquidity preference on regional development in Brazil. In the Post-Keynesian literature, endogenous money is introduced into economic activity through the credit provided by banks. The degree to which banks exhibit lower or higher liquidity preference is crucial to this process. Here we estimate the effect of liquidity preference and other financial variables on the number of Brazilian states' patents, in order to gauge the importance of the bank system to technological progress and regional development.     

The Theory of the Second Best and the Competitive Equilibrium Model

We study the international transmission of bank liquidity shocks from multinational, Islamic, bank-holding companies to their subsidiaries. Based on a total sample of 120 Islamic and conventional bank subsidiaries, we test whether foreign bank lending for Islamic and conventional banks is determined by different factors. We estimate a model that includes subsidiary and parent bank characteristics as well as host and home country variables. Our empirical findings show that lending is negatively affected by the fragility of conventional parent banks' subsidiaries. Nevertheless, we show that parent Islamic banks do not significantly affect lending by subsidiaries. Finally, we examine the market discipline regarding the transmission of liquidity shocks. We also find that reduction in foreign Islamic bank lending is stronger for those that are dependent on the interbank market. We establish that the depositors react to a deterioration of bank performance and punish their institutions by withdrawing their money. We show that market discipline has a more important role for Islamic banks, whereas liquidity needs determine the change in conventional banks.