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

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