Endogenous Money: Structuralist and Horizontalist

Levy Economics Institute Working Paper No. 512

23 Pages Posted: 11 Sep 2007

See all articles by L. Randall Wray

L. Randall Wray

University of Missouri at Kansas City; Bard College - The Levy Economics Institute

Date Written: September 2007


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.

Keywords: Monetary Theory and Policy, Horizontalist, Structuralist, Money Supply, Central Bank Targets, Central Bank Independence

JEL Classification: B5, E0, E4, E5

Suggested Citation

Wray, L. Randall, Endogenous Money: Structuralist and Horizontalist (September 2007). Levy Economics Institute Working Paper No. 512, Available at SSRN: https://ssrn.com/abstract=1010462 or http://dx.doi.org/10.2139/ssrn.1010462

L. Randall Wray (Contact Author)

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Bard College - The Levy Economics Institute

Annandale-on-Hudson, NY 12504-5000
United States

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