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The Endogenous Money Hypothesis – Empirical Evidence from the United States (1959-2008)

32 Pages Posted: 18 Nov 2013 Last revised: 23 Jan 2018

Paul Mueller

George Mason University

Joshua Wojnilower

Independent Evaluation Office of the IMF

Date Written: June 9, 2016

Abstract

Standard economic textbooks portray the money supply as exogenous. Most of these use a money multiplier framework to demonstrate the causal role of the monetary base in determining commercial bank lending and overall economic activity. In contrast, endogenous money theories attribute the determination of commercial bank lending and overall economic activity to the demand for credit, not the supply of money. In these theories, the demand for credit determines the supply of money, which banks create ex nihilo. We use updated Granger-causality tests to analyze quarterly U.S. data from 1959 to 2008 and find evidence that changes in commercial bank lending cause changes in both the monetary base and nominal income. Our results provide further support for the endogenous money views that the money supply has always been endogenous and that credit plays an important role in the money supply process. Endogenous money theories therefore provide a strong foundation for analyzing how credit and monetary policy affect overall economic activity.

Keywords: Endogenous Money, Money Multiplier, Credit, Money Supply, Monetary Base, Federal Reserve System, Granger-Causality

JEL Classification: C32, E40, E51, E58

Suggested Citation

Mueller, Paul and Wojnilower, Joshua, The Endogenous Money Hypothesis – Empirical Evidence from the United States (1959-2008) (June 9, 2016). Available at SSRN: https://ssrn.com/abstract=2355178 or http://dx.doi.org/10.2139/ssrn.2355178

Paul Mueller

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States

Joshua Wojnilower (Contact Author)

Independent Evaluation Office of the IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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