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Endogenous Money in the Age of Financial Liberalization

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  • Gökçer Özgür
  • Korkut Alp Ertürk

Abstract

The paper reports that no statistically significant empirical relationship can be shown between total bank credit and the US broad money supply in the period after 1995. It argues that the growing prevalence of non-bank deposits in the form of mutual money market funds and asset securitization are the main culprits for this result. Prior to financial liberalization, the connection between total bank credit and broad money supply was simple enough: new bank deposits were created when banks made loans and were extinguished when loans were paid back. In banks' consolidated balance sheet, total deposits made up total liabilities and were basically equal to the broad money supply. However, in the age of financial liberalization not all deposits bank loans created returned as deposits, whether in banks or non-banks, as deposits could be swapped for non-deposit liabilities without a corresponding draw down on the asset side. Moreover, loans could be extinguished in banks' balance sheets through asset securitization.

Suggested Citation

  • Gökçer Özgür & Korkut Alp Ertürk, 2013. "Endogenous Money in the Age of Financial Liberalization," Review of Political Economy, Taylor & Francis Journals, vol. 25(2), pages 327-347, April.
    • Handle: RePEc:taf:revpoe:v:25:y:2013:i:2:p:327-347
    DOI: 10.1080/09538259.2012.729928
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    References listed on IDEAS

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    1. Bank for International Settlements, 2005. "The role of ratings in structured finance: issues and implications," CGFS Papers, Bank for International Settlements, number 23.
    2. Jan Kregel, 2007. "The Natural Instability of Financial Markets," Economics Working Paper Archive wp_523, Levy Economics Institute.
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    Cited by:

    1. Sinha, Pankaj & Dutta, Dipanwita, 2011. "Modelling profitability of Indian banks," MPRA Paper 31156, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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