Endogenous money theory: horizontalists, structuralists and the credit market

This paper provides an empirical investigation of the endogenous money theory and of the internal debate between horizontalists and structuralists. To do this, SVAR models are implemented on monthly data for the euro area for the 2003–2017 period. The findings show that (i) the volume of loans is mainly affected by the level of demand rather than by credit supply conditions; (ii) the mark-up on bank loans is an exogenous variable, independent of the demand for credit and the volume of loans granted by banks; (iii) commercial banks are generally able to counterbalance a fall in profits – for example, driven by a price increase or a narrow credit supply conditions – through an increase of the mark-up; and (iv) an increase in the rate of growth of the economy reduces the mark-up by lowering the risk perceived by banks. These findings confirm both the relevant role played by demand forces in determining the banks’ loans and the horizontalist approach.