Dear Readers,
Let me start off by sincerely apologizing for my abrupt and
now lengthy absence from the blogosphere. Although I have been absent from
blogging, my interest in the endogenous money hypothesis and Modern Monetary
Theory (MMT) continues to grow.
This semester I have been taking a directed readings course on
those topics with another GMU PhD student, Paul Mueller. As part of the course,
we are co-writing two papers that will hopefully be published in an academic
journal. Our first paper, “Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008,” is now sufficiently complete to make publicly available.
The unique aspects
of our paper are the incorporation of Divisia monetary aggregates and a focus
on broader measures of the money supply (i.e. M3 and M4). While the
paper remains in draft status (so please do not cite this version), we would
greatly appreciate comments and suggestions for improving the paper before a
final draft is submitted for publication. The paper can be downloaded at SSRN (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178).
Here is the abstract:
“This paper demonstrates that contrary to orthodox monetary
theory, fluctuations in total commercial bank loans affect the quantity of
various money aggregates, including the monetary base, but not vice versa. The
Granger causality tests that we run on lagged quarterly data strongly suggest
that changes in the money supply depend on private demand for commercial loans,
not “exogenous” changes in the monetary base. Our findings strongly contradict
the notion of a fixed “money multiplier.” The theory behind endogenous money is
that banks issue new loans (credit) on demand and look for reserves later. The
Federal Reserve must ultimately accommodate increases in demand for reserves
from the banking sector to maintain an interest rate target and, more
importantly, financial stability. These findings suggest that most economists
need to revise their theories about monetary policy and credit expansion.”
Thank you in advance for taking the time to help and for continuing
to follow my blog.
(Note: In the past couple days it has come to my attention
that using Granger-causality tests on the first differences of variables may
lead to invalid results. Apparently a separate technique, created by Toda and
Yamamato, generates more valid results using extra lags of the variables in
levels as exogenous variables in the regression. The preliminary results using
this method don’t materially alter the paper’s conclusion. Since each technique
has been used in recently published articles, we would appreciate insight from
other economists on which method (or both) to include our final version.)
