The endogenous money supply revisited in a more realistic institutional framework

Yasuo Nishiyama

Journal of Post Keynesian Economics, 2014, vol. 36, issue 4, 653-672

Abstract: Textbooks explain that the Federal Reserve's (Fed's) open market purchase results in the multiple creation of loans and deposits (i.e., "reserves make deposits"). However, post Keynesian economists have long argued that banks make loans first, create deposits in the process, and then look for reserves. Hence, "deposits make reserves." The study revisits this post Keynesian theory with a new insight into large New York banks that act as intermediaries (as primary dealers in the textbook case, and as correspondent banks in the post Keynesian case) between the Fed and the nation's banking sector. The Granger causality tests and estimated short-run adjustment dynamics provide unambiguously strong empirical evidence in favor of the post Keynesian theory and the study's new insight, that is, the deposit creation process begins at banks, and large New York banks are indeed effective intermediaries between the Fed and the nation's banking sector.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:mes:postke:v:36:y:2014:i:4:p:653-672

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DOI: 10.2753/PKE0160-3477360404

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