The author of Unlearning Economics has written two good posts on the endogenous nature of money (i.e., the notion that the money supply adjusts to the demand for money). I agree with the author's assertion that recognizing the endogenous nature of money is important in order for policymakers to properly address issues relating to financial instability.
Just to add to this discussion, the key aspect about the endogenous nature of money is its ambivalent effects on the working of the economic system. On the one hand, as stressed by many post-Keynesian monetary economists (especially circuitistes and modern monetary theorists), the endogeneity of money enables both the level of investment and growth to surpass what it would otherwise be in a context of self-financing....
On the other hand, as recently emphasized by the staff economist of the Bank for International Settlements (BIS), the endogenous nature of money, by allowing investment to surpass the capacity of self-financing, also acts to intensify the inherent risks and instability of the modern economy (in which finance plays a critical role) by creating the conditions that lead to unsustainable booms in credit and asset prices that "can eventually lead to serious financial strains and derail the world economy" (Borio, 2011:27).Fictional Reserve Banking
Thoughts on endogenous money
circuit
8 comments:
Re Borrio’s point about unsustainable booms, the amount of commercial bank created money certainly expands prior to a crunch relative to central bank money (monetary base). Walter Bagehot pointed this out 150 years ago.
There is chart that shows this expansion very nicely in the case of Britain prior to the recent crunch. Scroll down a bit here:
http://tutor2u.net/economics/revision-notes/a2-macro-monetarism.html
There are also some relevant charts on the first few pages of this Credit Suisse work:
http://faculty.unlv.edu/msullivan/Sweeney%20-%20Money%20supply%20and%20inflation.pdf
Great post as always by circuit.
a few thoughts coming at this (endo/exo) from the authoritarian side...
To pose the question "Is money endo or exo?" is WEAK to begin with. The human has already lost as the context of the question assumes we are not in control of "money", or we do not even know how to capably describe our "money"... we perhaps are not in charge of this system... invisible hand at work, etc..
Where is the system boundary that determines endo/exo? To me, it is the boundary of human authority as implemented by our civil law here in the west... ie Is our "money" purely a legal construct (endo), or is our system even in the least bit dependent on factors outside of the law (exo)?
Using weight measures of metals as a medium of exchange and an accounting unit is definitely exogenous "money" to me... factors outside of the law at work here.
When determining endo/exo, you should perhaps always have to define where the system boundary is... do these economists who write about the exo/endo issue ever define succinctly where they see the system boundary?
circuit here: "the endogenous nature of money (i.e., the notion that the money supply adjusts to the demand for money)." It is not clear to me where his system boundary is... I assume it is the account of reserve balances, does this computer account have "a mind of it's own" or is it just the information system we use to maintain the ex post accounting record of certain collective human actions in the economy under our current arrangements?
Where/what is the system boundary?
rsp
"Using weight measures of metals as a medium of exchange and an accounting unit is definitely exogenous "money" to me... factors outside of the law at work here."
Um--- who says that we had to use weighted measurements? The law!
http://en.wikipedia.org/wiki/Gold_Standard_Act
It is all endogenous.
circuit here: "the endogenous nature of money (i.e., the notion that the money supply adjusts to the demand for money)." It is not clear to me where his system boundary is... I assume it is the account of reserve balances, does this computer account have "a mind of it's own" or is it just the information system we use to maintain the ex post accounting record of certain collective human actions in the economy under our current arrangements?
Seems to me both. The computer makes sure that there are always sufficient reserves in the spreadsheet to clear and if the cb is setting the rate w/o paying IOR, also that rb are constantly adjusted using OMO to maintain the rate in the desired corridor. Ex post, the significance is the accounting record. It's a very simple system that could be completely digitized and it probably is already highly so, if not yet completely. All the humans have to do is change the rate from time to time iaw the cb govs' decisions. If the cb govs decide to control the yield curve further out, that can be digitized to by setting the desired price and automatically adjusting a quantity by placing market orders. As Warren says, it's a very simple system that is easily digitized.
Adam,
Your example violates "my" system boundary (absolute human authority)... by bringing in the requirement to obtain weight measures of a physical metal. This is different than with our current system where yes, we have to acquire an information system to be able to do the accounting, but this required information system has no DIRECT bearing on our human ability to implement the medium of exchange. With a metal, you use the actual physical commodity to facilitate the exchange and STILL have to do the accounting (in the metal units no less)....
iow "the law" may read "use metal", but the law is rendered meaningless if there is no metal available... human authority (my system boundary) is violated by the requirement to obtain weight measures of the metal... hence exogenous.
rsp,
Adam,
I wrote this: " factors outside of the law at work here."
Perhaps this would be better: "factors outside of human authority applied thru law at work here"
ie the "boundary" is human authority, and any human authority should always be best applied thru civil law...
rsp,
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