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Money Supply Control: Base or Interest Rates? (1995)

In: The Central Bank and the Financial System

Author

Listed:
  • C. A. E. Goodhart

    (London School of Economics)

Abstract

Commercial bankers have traditionally seen themselves as playing a passive role in the money supply process. Bankers argued that, in general, they only lent out money that had first been deposited with them. There were two major flaws in this argument. First, the loan made on the basis of cash initially deposited generally led to the funds being redeposited in another bank. Creation of deposits was restrained by the banks’ need to keep reserves in the form of specie and/or Central Bank notes and deposits, in order to maintain the convertibility of their own liabilities into cash. Thus assuming a constant desired reserve/deposit ratio (D/R), the initial injection of one unit of reserves into the banking system would, if there were no subsequent drains of such cash reserves from the system, lead to an ultimate multiple increase in deposits of D/R, in reserves of 1, and in other bank assets (e.g. loans) of D/R — 1.

Suggested Citation

  • C. A. E. Goodhart, 1995. "Money Supply Control: Base or Interest Rates? (1995)," Palgrave Macmillan Books, in: The Central Bank and the Financial System, chapter 13, pages 249-262, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-37915-2_13
    DOI: 10.1057/9780230379152_13
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    Cited by:

    1. Giuseppe Fontana & Alfonso Palacio-Vera, 2004. "Monetary Policy Uncovered: Theory and Practice," International Review of Applied Economics, Taylor & Francis Journals, vol. 18(1), pages 1-19.
    2. Hsiao Chink Tang, 2006. "The Relative Importance Of Monetary Policy Transmission Channels In Malaysia," CAMA Working Papers 2006-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Thomas K. Rymes, 2004. "Modern Central Banks Only Have Real Effects," Chapters, in: Marc Lavoie & Mario Seccareccia (ed.), Central Banking in the Modern World, chapter 7, pages 127-143, Edward Elgar Publishing.
    4. C.A.E. Goodhart, 1997. "Whither now?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 50(203), pages 385-430.
    5. Malcolm Edey, 1997. "The Debate on Alternatives for Monetary Policy in Australia," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    6. C.A.E. Goodhart, 1997. "Whither now?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 50(203), pages 385-430.

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