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A Simple Economic Theory of Money Supply and Some Comments on Monetarist Double Count

34 Pages Posted: 20 Jun 2005  

Rainer Maurer

Pforzheim University

Date Written: May 2005

Abstract

In this paper I analyze the effect of money supply on total credit supply. The analysis shows that money supply of the central bank plus money supply of commercial banks increase total credit supply by the amount of central bank money minus the amount of central bank money reserves of commercial banks plus the amount of giro deposits of non-banks, i.e. money supply increases total credit supply by the monetary aggregate commonly called M1. Financial intermediation of commercial banks does not increase but decrease total money respectively credit supply, due to the fact that time deposits necessitate the holding of higher central bank money reserves by commercial banks. Consequently, it is only M1 that has the potential to cause inflation but not any other aggregate of M3.

Keywords: Money supply, credit supply, monetarist theory

JEL Classification: E51, E52

Suggested Citation

Maurer, Rainer, A Simple Economic Theory of Money Supply and Some Comments on Monetarist Double Count (May 2005). Available at SSRN: https://ssrn.com/abstract=745864 or http://dx.doi.org/10.2139/ssrn.745864

Rainer Maurer (Contact Author)

Pforzheim University ( email )

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