Money Creation: Reflections of an Ex-Central Banker on Exogenous/Endogenous Money
Alexander Pierre Faure
June 7, 2012
Exogenous money creation does not exist, but did under a past specie-money system. Central bank control of bank reserves and therefore control of bank deposit (money) creation via the money multiplier can exist, but this has nothing to do with the process of money creation. Rather, it is a style or model of monetary management, a style no longer in fashion because of its severe interest rate consequences. New bank deposits (money), also under a reserves-multiplier model, can only be created endogenously - beginning with the existence of a demand for bank loans which, when satisfied by the banks, leads to the simultaneous creation of bank deposits.
It is heartening that the 'home' of the Monetarist School model of money creation (based on the multiplier), the US, is showing distinct signs of recognition of the source of money creation being as described here. Bank reserve quantity changes are an outcome of deposit quantity changes (money creation) and not the driver thereof. Reserve requirement changes are just one of many sources of changes in bank liquidity, which are happily accommodated by the central bank at the policy/key interest rate, to make it effective.
Number of Pages in PDF File: 31
Keywords: money, endogenous money, exogenous money, central banking, banking, interest rates, monetary policy
JEL Classification: A22, E42, E51, E52, G21
Date posted: June 7, 2012 ; Last revised: June 15, 2012