Debate on reserve constraints and its implications for economic theory

Economic Annals-ХХI: Volume 155, Issue 11-12, Pages: 100-104

Citation information:
Cas, M. (2015). Debate on reserve constraints and its implications for economic theory. Economic Annals-XXI, 155(11-12), 100-104. https://ea21journal.world/index.php/ea-v155-22/

Marcel Cas
Ing. (Economics),
PhD Candidate,
Department of International Economic Relations and Economic Diplomacy,
Faculty of International Relations,
University of Economics in Bratislava
1/b Dolnozemska cesta, Bratislava 5, 852 35, Slovak Republic
marcel.cas@euba.sk

Debate on reserve constraints and its implications for economic theory

Abstract. The present paper deals with the main presuppositions and implications of endogenous money theory. The aim of this research is to prove that reserve money does not represent an effective constraint on bank lending and, therefore, to show that the theory of endogenous money represents a good approximation of the monetary system. We use a framework of basic financial accounting to trace and explain some of the most fundamental monetary operations in the monetary economy. We use this framework to enter into the debate about whether reserves are an effective constraint on bank lending. We argue that reserves are only a soft ex-post constraint on bank lending and not a hard ex-ante constraint. In the last section of the paper we derive some basic implications of endogenous money theory for economic theory in general. The paper is concluded with a proof that money neutrality thesis is not true. That means that monetary phenomena have a direct causal impact on real phenomena.

Keywords: Heterodox Economics; Theories of Money; Monetary Economics

JEL Classification: E51; E42; B50

References

1. Moore, B. (1979). The Endogenous Money Stock. Journal of Post Keynesian Economics, 2(1), 49-70.
2. Moore, B. (1983). Unpacking the Post Keynesian Black Box: Bank Lending and the Money Supply. Journal of Post Keynesian Economics, 5(4), 537-556.
3. Minsky, H. (1991). Endogeneity of Money. In Nell, E.J., & Semmler, W. (Eds.), Nicholas Kaldor and Mainstream Economics: Confrontation or Convergence? 207-220.
4. Graziani, A. (1989). The Theory of the Monetary Circuit. Thames Papers in Political Economy. Spring, 1-26.
5. Wray, R. L. (1991). Money and Credit in Capitalist Economies: The Endogenous Money Approach. Edward Elgar Publishing, Incorporated.
6. Wray, L. R. (2012). Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Palgrave Macmillan.
7. Jakab, Z., & Kumhof, M. (2015). Banks are not intermediaries of loanable funds – and why this matters. Bank of England working paper, 529.
8. Borio, C., & Disyatat, P. (2009). Unconventional Monetary Policy: An Appraisal. BIS Working Papers, 292.
9. Borio, C., & Disyatat, P. (2011). Global Imbalances and the Financial Crisis: Link or No Link? BIS Working Papers, 346.
10. Sheard, P. (2013). Repeat After Me: Banks Cannot and Do Not «Lend Out»Reserves. Ratings Direct, Standard & Poor‘s, August, 13.
11. Sigurjonsson, F. (2015). Monetary Reform – A better monetary system for Iceland. Edition 1.0. Reykjavik – Iceland.
12. Eggertsson, G. B., & Krugman, P. R. (2012). Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach. The Quarterly Journal of Econo­mics, 1469-1513.
13. Mcleay M., Radia A., & Thomas R. (2014A). Money in the modern economy: an introduction. Quarterly Bulletin of the Bank of England, Q1 2014.
14. Werner, R. A. (2014). Can banks individually create money out of nothing? – The theories and the empirical evidence. International Review of Financial Analysis, 1-19.
15. Mcleay, M., Radia, A., & Thomas, R. (2014B). Money Creation in the Modern Economy. Quarterly Bulletin of the Bank of England, Q1 2014.
16. Tobin, J. (1963). Commercial Banks as Creators of Money. Cowles Foundation Discussion Papers, 159.
17. Keen, S. (2011). Debunking Economics: The naked emperor dethroned? Revised and expanded edition, Zed Books.
18. Biggs, M., Mayer, T., & Pick, A. (2009). Credit and economic recovery. DNB Working Paper, 218.
19. Lindner, F. (2012). Saving Does Not Finance Investment: Accounting as an Indispensable Guide to Economic Theory. IMK Working Papers, 100.

Received 25.10.2015