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Endogenous Money: Structuralist and Horizontalist

  • L. Randall Wray

While the mainstream long argued that the central bank could use quantitative constraints as a means to controlling the private creation of money, most economists now recognize that the central bank can only set the overnight interest rate-which has only an indirect impact on the quantity of reserves and the quantity of privately created money. Indeed, in order to hit the overnight rate target, the central bank must accommodate the demand for reserves, draining the excess or supplying reserves when the system is short. Thus, the supply of reserves is best characterized as horizontal, at the central bank's target rate. Because reserves pay relatively low rates, or even zero rates (as in the United States), banks try to minimize their holdings. Over time, they continually innovate, as they seek to minimize costs and increase profits. This includes innovations that reduce the quantity of reserves they need to hold (either to satisfy legal requirements, or to meet the needs of check cashing and clearing), and also innovations that allow them to increase the rate of return on equity within regulatory constraints, such as those associated with Basle agreements. Such behavior has been a central concern of the structuralist approach-which argued that it is too simplistic to hypothesize simple horizontal loan-and-deposit supply curves.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_512.

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Date of creation: Sep 2007
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Handle: RePEc:lev:wrkpap:wp_512
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. Marc Lavoie & Mario Seccareccia, 2001. "Minsky's financial fragility hypothesis: a missing macroeconomic link?," Chapters, in: Financial Fragility and Investment in the Capitalist Economy, chapter 4 Edward Elgar.
  2. Dimitri B. Papadimitriou & L. Randall Wray, 1999. "Minsky's Analysis of Financial Capitalism," Economics Working Paper Archive wp_275, Levy Economics Institute.
  3. Perry Mehrling, 2000. "Modern Money: Fiat or Credit?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(3), pages 397-406, April.
  4. Ann-Marie Meulendyke, 1988. "Can the Federal Reserve Influence Whether the Money Supply Is Endogenous? A Comment on Moore," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 10(3), pages 390-397, April.
  5. Geoffrey W. Gardiner, 2004. "The Primacy of Trade Debts in the Development of Money," Chapters, in: Credit and State Theories of Money, chapter 6 Edward Elgar.
  6. Robert Pollin, 1991. "Two Theories of Money Supply Endogeneity: Some Empirical Evidence," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 13(3), pages 366-396, April.
  7. Thomas I. Palley, 1991. "The Endogenous Money Supply: Consensus and Disagreement," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 13(3), pages 397-403, April.
  8. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-44, December.
  9. Stephanie Bell & L. Randall Wray, 2002. "Fiscal effects on reserves and the independence of the Fed," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(2), pages 263-271, December.
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