Let me start off by sincerely apologizing for my abrupt and now lengthy absence from the blogosphere. Although I have been absent from blogging, my interest in the endogenous money hypothesis and Modern Monetary Theory (MMT) continues to grow.Bubbles and Busts
This semester I have been taking a directed readings course on those topics with another GMU PhD student, Paul Mueller. As part of the course, we are co-writing two papers that will hopefully be published in an academic journal. Our first paper, “Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008,” is now sufficiently complete to make publicly available.
The unique aspects of our paper are the incorporation of Divisia monetary aggregates and a focus on broader measures of the money supply (i.e. M3 and M4). While the paper remains in draft status (so please do not cite this version), we would greatly appreciate comments and suggestions for improving the paper before a final draft is submitted for publication. The paper can be downloaded at SSRN (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178). Here is the abstract:
“This paper demonstrates that contrary to orthodox monetary theory, fluctuations in total commercial bank loans affect the quantity of various money aggregates, including the monetary base, but not vice versa. The Granger causality tests that we run on lagged quarterly data strongly suggest that changes in the money supply depend on private demand for commercial loans, not “exogenous” changes in the monetary base. Our findings strongly contradict the notion of a fixed “money multiplier.” The theory behind endogenous money is that banks issue new loans (credit) on demand and look for reserves later. The Federal Reserve must ultimately accommodate increases in demand for reserves from the banking sector to maintain an interest rate target and, more importantly, financial stability. These findings suggest that most economists need to revise their theories about monetary policy and credit expansion.”
Thank you in advance for taking the time to help and for continuing to follow my blog.
Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008
Joshua Wojnilower
4 comments:
Good to see some actual science in these interminable debates.
Coming out of George Mason too!
If I recall correctly GMU has an Austrian flavor to it.
Dan,
"science": how do you see this?
via these "Granger causality tests"?
iow WE may KNOW that "loans create deposits" thru like 'rote' (I submit this is how I learned it anyway), but Joshua and his associate are going thru the 'scientific' process and showing 'why' this is true?
ie they are 'teaching' it thru a different process?
Is this what you mean by your observation that you see some 'science' coming in here?
I think this is a pretty profound paper these two are putting together here... but I would say it should be profound for the 'scientific' community... iow I (for one) do NOT need them to do all of this rigor to believe 'loans create deposits'...
rsp,
Thank you for posting this link and helping encourage discussion to improve upon our current effort.
Dan - Appreciate the support.
Greg - You are very correct about GMU's Austrian flavor. Personally I'm sympathetic to the structure of production aspect of cycles, but I clearly disagree with their general assumptions about the monetary system. Slowly but surely I'm gathering supporters for the endogenous money approach.
Matt - I can appreciate your opinion and agree this paper is not directly intended for those who already accept the premise of endogenous money (although perhaps the results relating to broader, slightly different, money supply measures will offer something new). The larger purpose from my perspective is to discourage the continued dominance of models that include an exogenous money supply and money multiplier in introductory econ courses, including at the graduate level. Certainly one empirical paper won't alter the ingrained curriculum, but hopefully over time we can chip away at the strong hold of such models and assumptions.
I'm very open to comments and/or suggestions to improve the paper with an eye towards getting published. Thank you in advance to all those willing to spend a bit of their precious time reading the paper and offering help.
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