On the monetary policy in an economy with banks endogenously creating money |
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| Authors: | X. Henry Wang Bill Yang Alex Young |
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| Affiliation: | 1. Department of Economics, University of Missouri – Columbia, Columbia, Missouri, USA;2. Professor Emeritus of Economics, Department of Economics, Parker College of Business, Georgia Southern University, Georgia, Statesboro, USA;3. Department of Accounting, Frank Zarb School of Business, Hofstra University, Hempstead, New York, USA |
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| Abstract: | This paper attempts to employ a microeconomic model (industrial-organization approach to banking) to formalize the concept that banks in an economy may also unilaterally create money, at least initially, rather than passively multiplying the base money exogenously issued by the Central Bank in the money creation process. It shows that in equilibrium, banks may indeed create money (bank deposits) when making loans without relying on the newly issued base money from the Central Bank. Instead, the endogenously created money by banks would cause the Central Bank to endogenously adjust base money to hit the target policy interest rate. |
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