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

Matteo Deleidi () and Enrico Levrero ()

Metroeconomica, 2019, vol. 70, issue 4, 552-586

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.

Date: 2019
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Handle: RePEc:bla:metroe:v:70:y:2019:i:4:p:552-586