The money creation process: A theoretical and empirical analysis for the United States

Abstract

The aim of this paper is to assess—on both theoretical and empirical grounds—the two main views regarding the money creation process, namely the endogenous and exogenous money approaches. After analysing the main issues and the related empirical literature, we will apply a vector autoregression model and a vector error‐correction model methodology to the United States for the period 1959–2017 to assess the causal relationship between a number of critical variables that are supposed to determine the money supply, that is, the monetary base, bank deposits, bank loans and the nominal level of economic activity. The empirical analysis supports several propositions related to the endogenous money approach. In particular, it shows that for the United States in the years 1959–2017 (a) bank loans determine bank deposits and (b) bank deposits in turn determine the monetary base. Our conclusion is that money supply is mainly determined endogenously by the lending activity of commercial banks and the nominal level of economic activity.

Money Creation in the Eurozone: An Empirical Assessment of the Endogenous and the Exogenous Money Theories

“…Recently, Badarudin et al (2013) find evidence of money endogeneity in G-7 economies by applying both a VECM and a trivariate vector autoregression model (VAR). Similarly, by using a VECM for the US economy and taking into consideration several monetary aggregates, Deleidi and Levrero (2019) support the money supply endogeneity hypothesis. Finally, by making use of panel cointegration techniques, Liu and Kool (2018) show the existence of a long-run relationship between bank loans and monetary aggregates in the euro area.…”

“…In this paper we apply the econometric methodology proposed by Howells and Hussein (1998), Holtemöller (2003), Cifter and Ozun (2007), Badarudin et al (2013), and by Deleidi and Levrero (2019). Furthermore, we introduce some methodological innovations concerning the estimation of structural breaks and the cointegration test.…”

“…In the last twenty-five years, a number of econometric studies have tried to empirically assess if the supply of loans is created endogenously by the interaction between banks, 9 For an in-depth review of the debate between these two approaches, see among others Lavoie (1996), Palley (1996), Rochon (2001), Fontana (2003Fontana ( , 2004 and Deleidi (2019Deleidi ( , 2020. 10 For an in-depth empirical and theoretical review of the EXMT, see among others Deleidi and Levrero (2019).…”

Crisis and the Role of Money in the Real and Financial Economies—An Innovative Approach to Monetary Stimulus

“…15 Following Hahn (1924), 16 formal endogenous money creation (BOE 2014) occurs when bank balances are created from loans 17 within the banking system (Werner 2014). 18 Between 1959 and 2017 a link can be observed between growth in monetary aggregate M1 and GDP (Deleidi and Levrero 2019). Liquidity also matters.…”

Banks are Not Intermediaries of Loanable Funds — Facts, Theory and Evidence

“…Asset-trading ILF models are variants of ILF models that allow the size of bank balance sheets to also change with changes in either banks' Christiano et al (2014), is the subject of ongoing work. Deleidi and Levrero (2019) study the US money creation process using VAR and VECM methods and find strong evidence for the FMC mechanism. holdings of or the value of physical capital, or of securities that represent claims to physical capital.…”