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

Enrico Levrero () and Matteo Deleidi ()

MPRA Paper from University Library of Munich, Germany

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 VAR and VECM methodology to the United States in the period 1959-2016 to assess the causal relationship between a number of critical variables that are supposed to determine the money supply, i.e., the monetary base, bank deposits and bank loans. The empirical analysis carried out supports several propositions of the endogenous money approach. In particular, it shows that for the United States in the years 1959-2016 (i) bank loans determine bank deposits and (ii) 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.

Keywords: Money endogeneity; USA; Money Supply (search for similar items in EconPapers)
JEL-codes: C32 E40 E50 E51 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-mac, nep-mon and nep-pay
Date: 2017-10
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