How excessive endogenous money supply can contribute to global financial crises

Abstract

Financial crises have become a challenge for sustainable growth, given the frequency and intensity of crisis shocks and their destructive consequences in recent decades. The paper aims to study how the endogenously generated excess money supply can contribute to global financial crises. The creation of money supply is examined from the perspective of the Quantity Theory of Money (QTM) and endogenous money, namely Horizontalism, Structuralism, and Modern Money Theory. Given that prices are not flexible in the short term, increased volatility in the money market prevents a short-term ready balance between money supply and output. The overall result of money supply accommodation can be unpredictable if monetary authorities and commercial banks do not pool their interests, and the money demand volatility becomes extremely high. The study of the correlation between money supply and output allowed distinguishing between neutral countries in the creation of extra liquid assets and countries that can be a potential trigger for excessive money supply volatility. Monitoring the dynamics of M3 and GDP showed that before the significant crisis periods of 1997–1998, 2007–2008, and 2019–2020, the growth of money supply was more than 8%. The established critical level confirms the potential contribution of endogenously created excess money supply to global financial crises.