Money Matters: There is No Such Thing as a Money 'Supply'
Monetary literature remains plagued by references to money “supply” at a time when the endogeneity of money is becoming generally accepted. Money endogeneity is not a hypothesis; it is a fact, and one that has existed since a goldsmith-banker wrote out the first receipt (bank note) and handed it to a borrower (as opposed to a depositor of gold coins). The creation of money has always been endogenous, even under the Friedman-Schwartzian Monetarist fixed-money-rule model. Once this is accepted, then it is logical to refer to the quantity or stock of money, and to the supply of bank credit. The household, corporate and government sectors borrow from banks to consume (C) or invest (I), which are the major components of nominal GDP [C + I + net exports (= aggregate demand, AD)]. Domestic credit extension (DCE) thus represents the link between the monetary and real economies. Money creation is the outcome of the change in DCE; the latter, not the change in M, approximates the change in AD (there are other influences). The essence of monetary policy is that the central bank controls the (reference) prime lending rate (PR) of banks via its policy interest rate (PIR), and thereby the demand for bank credit. It controls PR in normal (ie non-QE) times by manipulating the liquidity of banks to a borrowed reserves condition (actual, close to, or threat of), in order to make the PIR effective. The causation path is clear.
Money Creation: The Sources
The endogenous-exogenous money debate is a futile one. Exogenous money creation, based on the money multiplier, is not a money creation process. Rather, it is a monetary policy model, but in it money is still created endogenously: bank loans (and foreign asset accumulation by banks) concurrently create new bank deposits (money). This simple fact is obscured by the powerful thesis of Friedmanian Monetarism, and the sharp antithesis of the Post-Keynesian School, as, therefore, is the simple balance sheet analysis of money creation (which disappeared from the literature). This article argues the above, and resurrects the straightforward balance sheet monetary analysis, as the only way to present the sources of money creation. It elucidates the balance sheet sources, as well as the underlying actual sources: the demand for loans (and their satisfaction), and bank decisions regarding foreign asset accumulation. It also covers money destruction.
Deliberative Democracy and the Resource Curse: A Nationwide Experiment in Tanzania
Oil and gas discoveries in developing countries are often associated with short-sighted economic policies and, in response, calls to insulate resource management from populist impulses. We report on a randomized experiment testing methods to overcome this apparent tension between sound resource governance and democratic politics. Soon after Tanzania’s discovery of major natural gas reserves, we invited a nationally representative sample of voters to an intensive public deliberation of policy options featuring nationally recognized experts and small-group discussions. Democratic deliberation reinforced the public’s strong preference for rapid spending of gas revenues, but also increased support for various prudential and economically orthodox measures, including independent oversight of gas revenues, limits on government borrowing, and selling gas abroad rather than subsidizing fuel at home. These effects were driven by deliberation per se, rather than a pure information treatment, and show no evidence of contamination by facilitatoror peer-effects in group deliberations. www.cgdev.org Justin Sandefur, Nancy Birdsall, James Fishkin, and Mujobu Moyo