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Reconciling Orthodox and Heterodox Views on Money and Banking

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  • David Andolfatto

Abstract

A wide range of heterodox theories claim that banks are special because they create money in the act of lending. Put another way, banks can create the funding they need ex nihilo, whereas all other agencies must first acquire the funding they need from other parties. Mainstream economic theory largely agrees with this assessment, but questions its theoretical and empirical relevance, preferring to view banks as one of many potentially important actors in the financial market. In this paper, I develop a formal economic model in an attempt to make these ideas precise. The model lends some support to both views on banking.

Suggested Citation

  • David Andolfatto, 2018. "Reconciling Orthodox and Heterodox Views on Money and Banking," Working Papers 2018-27, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2018-027
    DOI: 10.20955/wp.2018.027
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    References listed on IDEAS

    as
    1. David Andolfatto, 2015. "A Model of U.S. Monetary Policy Before and After the Great Recession," Review, Federal Reserve Bank of St. Louis, vol. 97(3), pages 233-256.
    2. Lagos, Ricardo & Rocheteau, Guillaume & Weill, Pierre-Olivier, 2011. "Crises and liquidity in over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2169-2205.
    3. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers 159, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Dirk Niepelt, 2020. "Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics," Working Papers 20.05, Swiss National Bank, Study Center Gerzensee.
    2. Ostapenko, V. & Buglevsky, E., 2022. "Money supply in the history of macroeconomic thought: 50 shades of endogeneity," Journal of the New Economic Association, New Economic Association, vol. 55(3), pages 156-176.
    3. Brunnermeier, Markus K. & Niepelt, Dirk, 2019. "On the equivalence of private and public money," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 27-41.
    4. Christian Wipf, 2020. "Should Banks Create Money?," Diskussionsschriften dp2015, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    Keywords

    Heterodox view; Money; Banking;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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