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How excessive endogenous money supply can contribute to global financial crises

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Abstract

Financial crises have been a challenge for sustainable growth, given the frequency and intensity of the crisis shocks and their destructive consequences taken place in the last decades. The paper aims to study how the endogenously created excess money supply can contribute to global financial crises. The money supply creation is examined from the Quantity Theory of Money (QTM) and endogenous money perspective, namely Horizontalism, Structuralism, and Modern Money Theory. Considering the prices are not flexible in the short term, advanced volatility in the money market hinders the short-run ready balance between money supply and output. The overall result of money supply accommodation may be unpredictable if monetary authority and commercial banks do not pool their interests, and the money demand volatility becomes extremely high. Examining the correlation between money supply and output has distinguished neutral countries in creating extra liquid assets and countries that can be a potential trigger for excessive money supply volatility. Monitoring the dynamics of M3 and GDP has revealed that before the significant crisis periods of 1997-1998, 2007-2008, and 2019-2020, the money supply growth is more than 8%. The established critical level validates the potential contribution of the endogenously created excess money supply to global financial crises.

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  • Shvets, Serhii, 2021. "How excessive endogenous money supply can contribute to global financial crises," MPRA Paper 110191, University Library of Munich, Germany, revised 30 Jul 2021.
    • Handle: RePEc:pra:mprapa:110191
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    References listed on IDEAS

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    More about this item

    Keywords

    the quantity theory of money; endogenous money; financial crisis; monetary policy; quantitative easing;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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