(Tiểu luận) group assignmentcourse monetary and financial theories

NATIONAL ECONOMICS UNIVERSITY FINANCIAL ECONOMICS (FE) -*** - GROUP ASSIGNMENT COURSE: MONETARY AND FINANCIAL THEORIES CLASS: FE63 GROUP Full name Student HD Đỗ Mai Anh 11210335 Phạm Thị Thu Nga 11214172 Nguyễn Thị Thu Quỳnh 11219551 Lê Ngọc Thùy Tiên 11219556 Nguyễn Hà Anh 11219527 Đặng Kiều Ngân 11219546 HA NOI, 2022 TOPIC: Money is created endogenously 1.Definition 1.1 Money Money is a medium of exchange that is centralized, generally accepted, recognized, and facilitates transactions of goods and services ● Money is a medium of exchange for various goods and services in an economy ● The money system varies with the governments and countries ● Different countries have different currencies ● The central authority is responsible for monitoring the monetary system 1.2 Compare Endogenous and exogenous money Definition Endogenous Money Exogenous Money Endogenous money is an economy’s supply of money that is determined endogenously—that is, as a result of the interactions of other economic variables, rather than exogenously (autonomously) by an external authority such as a central bank  The “money supply” is endogenous if we believe that the central bank sets the policy rate of interest; the level of money is determined by factors within the private sector (The root endo- implies that it is an internal property; that is, the level of the money supply is determined within the model of the private sector.) Exogeneity means the supply of money is independent of demand Exogenous Money is an economy’s supply of money that is determined exogenously—that is, if the existence and quantity of money are determined by forces outside the economy — most often by the state — money is considered exogenous Exogenous money that part of the money supply that is ‘put into’ the economic system from outside by the government  The “money supply” is exogenous if we believe that it is set directly by the central bank; private agents within the economy will set interest rates on instruments in response to the supply of money (Exo- is the Greek root that indicates that something is external; in this case, the money supply is set externally to the model of the private sector.) Origins and - According to Knapp (1924) and his evolution of followers, on the one hand, money was money introduced by the authorities Money is thus an exogenous creation of law and the state Austrian economists argue that fiat money did not endogenously (read: spontaneously) emerged on the free market, but resulted from exogenous government intervention in the monetary - According to Menger (1871), money sphere was not the top-down result of an act of (For example, Hoppe, 1994; will, but the unplanned product of Hülsmann, 2008) market mechanisms Money evolved spontaneously in the market through the self-interested actions of individuals who wanted to improve their position - Mainstream economists believe that money endogenously evolved from commodity money to Fiat money, as individuals economize on production and transaction costs The role of - For Fontana (2003 , 291–92), “the the monetary essence of endogenous money theory is system that the stock of money in a country is determined by the demand for bank credit, and the latter is causally dependent upon the economic variables that affect the level of output.” - In practice, the central bank can decide to respond more or less to commercial banks’ demand for reserves, rendering it dependent on the state of the economy and thus endogenous  “Inside Money” Bank money - For example, it is widely believed that under the gold standard— understood here as a monetary system without a central bank and government intervention in the monetary sphere, with gold as the outside money—the money supply is exogenous, as the total stock of gold cannot be increased at will - Commercial banks have no control over the money supply In a full reserve system, they cannot create money at all, while in a fractionalreserve system, they need gold reserves, the supply of which cannot be increased at will—that is, the reserves constitute an exogenous constraint on credit creation → This is the core of the main argument for and against the gold standard: neither the government nor the banking system is able to arbitrarily increase the money supply For supporters of this system, it protects people against inflation, while for opponents it makes the monetary system not elastic enough to stimulate the economy during recessions - Under a fiat standard, the supply of money is exogenous, when the world is understood as being outside the market system, as it is determined, at least partially, by the central bank, a non market institution - In principle, under a fiat standard, the central bank, a monopolistic producer, can choose the supply of outside money to be whatever it wants  “Outside Money” - The endogenous view claims that Exogenous approach to money loans create deposits creation - The supply of money is considered - The Exogenous approach to endogenous in this view as it is determined by firms’ need to pay for the costs of production + The production decisions of companies generate the demand for loans (Moore, 1988) + Commercial banks set the interest rate on loans (the policy rate plus a markup) and accommodate the demand for loans  Money supply is endogenous since demand for finance by private firms is always matched by increasing money supply by the central bank - As Rochon and Rossi (2013, 224) put it, “Money is and has always been an endogenous phenomenon, owing to its being essentially tied to the nature of debt and the need for a means of final payment that has to be provided by a third party on the agents’ demand.” money predicts that reserves, or base money, will move first,followed by broader, credit based measures of the money supply as this was ‘lent out” - Exogenous money creation is based on the money multiplier however it is not a process of money creation Instead, through bank loans and rise in foreign assets made by banks which at the same time creates new bank deposits The importance of The Central Bank (RBA) in the exogenous theory is very high, as The Central bank offers serious judgments and decisions on money supply and creation - Exogenous money has predicted that the RBA has the right to control the quantitative aspects in money supply and creation The RBA controls the amount of base money when required - The Central Bank expands reserves, while private banks then convert them into loans, while keeping a percentage of the reserves, for the accommodation of money demand from customers (Godley and Lavoie, 2016) - Further, when deposits of loans are made a fraction of the loan is kept and this procedure is continued until nothing is left to lend out Thus,the procedure of creation completed by the money multiplier is consistent over time and will offer the Central Bank the capability to have control over money supply - Additionally, RBA can effectively manage the monetary base, i.e., the requirement of the total amount of currency in reserves and circulation by open market operations and the need for reserve ratio The quantity of loans is the opposite, banks are required to retain portions as reserves, in the situation of exogenous money, the central banks makes the expansion in the base money supply, and the response of banks to this, i.e., the amount left to lend out (Greenwood,Hanson and Stein, 2015) Exogenous/ Endogenous in the statistical and policy senses The money supply may be endogenous and either controllable, through the central bank’s reaction function, or not, because of money supply disturbances generated from within the economy and outside the central bank’s control (Palley, 2002) In the control - The fact that the central bank supplies sense reserves on demand implies that the monetary base is not exogenous (in the sense of being the source of change in the economy) but rather a function of investments and demand for loans, or the needs of trade - For example, in the quantity theory of money, the money supply is supposed to be exogenous It is similarly uncontroversial that the moneymultiplier model assumes the monetary base is exogenous - When economists model the private sector, including its response to some policy changes, it makes sense to assume that money is exogenous in the policy sense— that is, that policy parameters are exogenous In that sense, the exogeneity of the money supply implies that “its nominal size is or can be controlled by the monetary authorities and does not automatically change as people make payments or try to build up or run down their money holdings” (Yeager, 1997, 131)  It responds endogenously to -The monetary authorities control changes in the demand for money and the monetary base and that there is other developments in the economy a strong link between it and the (Chick, 1973) broader monetary aggregates; Document continues below Discover more Monetary and from: Financial… Đại học Kinh tế… 73 documents Go to course CỔ Premium PHIẾU ƯU ĐÃI Overview of… Monetary and… 100% (5) Bài Premium tập phân tích cấu trúc lãi suất Monetary and… 100% (3) Premium Lttctt - Monetary and Financial… Monetary and… 100% (1) PremiumQ - no Practices description Monetary and… 100% (1) Premium- ergq34ag In Keynes Monetary and Financial… None History of Banknote The central function: + + bank’s Monetary and hence the money supply as a be taken as policy-response whole canFinancial… exogenous The endogeneity of money depends on both the central bank’s behavior and the actions of commercial banks, which are not fully dependent on the central bank - For horizontalists: the endogeneity of money depends exclusively on the monetary authority and its willingness to meet the demand for reserves According to this view, the central bank exogenously sets the interest rates at which it fully accommodates demand for reserves that results from banks’ decisions to meet all creditworthy borrowers’ demand for loans Thus, under this approach, the money supply curve is horizontal—that is, perfectly interest elastic, as, although the central bank sets the short-term interest rate, it has to always accommodate bank demand for reserves in order to preserve the stability of the financial system (Moore, 1998)  Following the horizontalist and structuralist money are being considered to be endogenous not exogenous 1.3 Examples for endogenous money and exogenous money in the real world Most of the money we use is actually endogenous - None The central bank reacts to economic developments; hence the monetary base cannot be exogenous But central banks alter their policy targets in response to developments in the economic system, implying the endogeneity of money (Moore, 1998) Endogeneity/ - For structuralists: Exogeneity + Money is endogenous, because in the —thanks to innovative horizontalist techniques of management of and assets and liabilities— structuralist commercial banks can lend senses largely free of any central bank constraint (Howells, 2005) + thuyết trình Endogenous money is created when banks make loans When you get a mortgage loan for $100,000, the lending bank simply marks up your account by $100,000 (a bank liability), and you execute a promissory note for $100,000 + interest; the promissory note is a bank asset As you repay the loan principal, the newly created bank money is extinguished on the bank’s books, but in the meantime, those dollars are free to be spent, over and over This type of money is the stuff that fills our bank accounts, and makes up most of the supply of money that we actually use for transactions, M1 money - The key attribute of bank-created money is that for every dollar in existence, there is also a dollar of debt; bank-created assets and liabilities net out to zero It is impossible for a bank to simply create dollars without a balancing debt on the other side of the ledger Another key attribute of bankcreated money is that it cannot exist outside of bank ledgers (When you hold cash, you are holding a government liability that is serving as a substitute for a bank liability.) - Exogenous money comes from outside of the domestic private banking system The main source of exogenous money in the U.S is the government Treasury sells bonds (which are government liabilities) to the private sector to fund government spending The Fed, our central bank, buys those bonds in exchange for reserves, which are simply settlement funds of private banks held in Federal Reserve banks Since the Fed is not part of the private banking system, these reserves are exogenous money; reserves (and cash, which is exchangeable for reserves) are held by the private sector without corresponding debt So the private sector holds government-created liabilities (reserves, cash, and bonds) as net financial assets The government, specifically the Treasury, holds trillions in net liabilities, which are only extinguished by net taxation (running a budget surplus) But there is no pressure on the government to extinguish these liabilities; they can exist in perpetuity, unlike the liabilities of private banks.Another form of exogenous money is foreign currency Countries that run trade surpluses have a net inflow of foreign currencies, which are exogenous to the domestic system Banks hold foreign currency as an asset; foreign currency can be used in trade, or it can be used to exchange for your own currency, but it cannot be directly converted into domestic currency So the money we use for daily transactions is mostly endogenous, bank-created money, and partially exogenous, government-created money - Today, if we want money in order to be able to create or satisfy a need, we need to exchange something – our labor or something of value Thus, as far as we are concerned, current money is exogenous, i.e it is provided externally and is independent of our activity However, for banks, who create money, it is endogenous – money is created as part of their banking activity; i.e banking and money creation are integral Similarly, Bitcoin, other than when it is “mined”, is exogenous to users We have to exchange something of value (labor or goods) to acquire Bitcoins However, to those who “mine” Bitcoins, they are endogenous, i.e Bitcoins are generated as part of the miners’ activity Building on the ideas generated from the taxonomy of money described previously, we can create endogenous tokens (aka money) for all, i.e token creation becomes integral to the human activity of satisfying needs through creation (of goods and services) and exchange Theory of endogenous money Based on main claim: 2.1 Loans create deposits: For the banking system as a whole, drawing down a bank loan by a non-bank borrower creates new deposits (and the repayment of a bank loan destroys deposits) So while the quantity of bank loans may not equal deposits in an economy, a deposit is the logical result of a loan – banks not need to increase deposits prior to extending a loan The supply of money is considered endogenous in this view as it is determined by firms’ need to pay for the costs of production The production decisions of companies generate the demand for loans Commercial banks set the interest rate on loans and accommodate the demand for loans 2.2 While banks can be capital-constrained, in most countries a solvent bank is never reserve-constrained or funding-constrained: It can always obtain reserves or funding either from the interbank market or from the central bank 2.3 Banks rationally pursue any profitable lending opportunities that they can identify up to the level consistent with their level of capital, treating reserve requirements and funding issues as matters to be addressed later—or rather, at an aggregate level Therefore, the quantity of broad money in an economy is determined endogenously: in other words, the quantity of deposits held by the non-bank sector 'flexes' up or down according to the aggregate preferences of non-banks Significantly, the theory states that if the non-bank sector's deposits are augmented by a policy-driven exogenous shock (such as quantitative easing), the sector can be expected to find ways to 'shed' most or all of the excess deposit balances by making payments to banks (comprising repayments of bank loans, or purchases of securities) Conclusion It is difficult to answer the question of whether money is endogenous or exogenous Central banks might not have full control of the money supply, but as long as they maintain a non-negligible influence on markets, it doesn't really matter Central banks are not passive institutions that only accommodate the demand for money.Money has both endogenous and exogenous aspects, as we know that monetary policy operates through the banking system When it broke down in the aftermath of the global financial crisis, central banks implemented unconventional monetary policies.The impact of monetary policy is less mechanical and more subtle than the monetarist textbooks seem to describe Central banks not directly determine the money supply by controlling the reserve-requirement ratio and the size of the monetary base, but only indirectly by setting interest rates In our monetary system, when the bank advances the entrepreneur a loan, it is not the transfer of existing purchasing power, but "the creation of new purchasing power out of nothing" This is important because money is created with the simultaneous creation of an asset and a liability by the banking sector We can show as: Exogenous money: ● Is the property of an elevated financial class 10 ● It is 'loaned' into circulation ● according to unstable cycles (put it ● in, take it away 'business cycles') ● Is a social/democratic institution Is issued and accessed according to fair rules, according to human and Circulates as interest-bearing debt democratic rights (Tribute economy.) ● Supports a largely interest-free economy Endogenous money: Understanding these contrasts could hardly be more important, because they clearly point to stark differences in how they work and how we should all relate to money You may already understand that, while money is categorically endogenous and socially constructed, most of the world's people live hopelessly subject to money as if it were exogenous to them If money were exogenous, like gold or silver, then we would know where it comes from; it would come from mines or other similar production facilities And we would know how it would be introduced into circulation too; it would be introduced largely as interest bearing loans, in order to ensure the maximized long-term profits of financial capitalists We know how ordinary people would get access to exogenous money; by borrowing it at interest - if they are allowed to And we know how governments would get access to it; by borrowing it at interest too It's almost impossible to imagine exogenous money being given a democratic foundation; it would require massive state intervention and, for example, the nationalization of gold/silver production and the establishment of interest free financing for both the public and household sectors These great improbabilities say nothing of the other impracticalities of commodity forms of money; like, for example, doubling the movement of all transported goods in the world with the transport of physical monies to pay for them It's fair to say, then, that exogenous concepts of money aren't only inaccurate, they're profoundly harmful to us all No such system could begin or be maintained in a state of justice or fairness Without massive state intervention, all money would be the interest bearing private property of economic elites - because it would all be loaned into circulation It would be a world in the grip of a wealthy minority, replete with the immense weight of interest bearing debt we're all familiar with under global capitalism And yet, as mentioned, it is this concept of money which has been fostered in the minds of almost all human beings 11 Looking now at endogenous money, where money is endogenous, then we can say where it comes from; it would come into and out of existence as and when people need it, as we go into and out of debt Ordinary citizens would have access to money, not by "borrowing" it, but through a process of money creation that requires no "lending" and no interest Governments too would have a democratic relationship to money and, for example, create money endogenously debt and interest free A persistent debt and interest free currency base is a good idea if we want people to be able to keep savings, immune from demands for repayment And governments can hold international debts in the same way we as households hold debts internally within society: facilitated by endogenous money creation and free of both lender-borrower relations and interest Endogenous money is also practical to use; it doesn't require the shipment of vast quantities of physical materials in order to pay for all our goods and services and most/all financial transactions can be carried out at low cost, mostly by mere instruction alone i.e banks can credit and debit accounts simply by raising one number and lowering another We can say this system would be a lot fairer; it is not the world in the grip of a super-rich minority, vast numbers of other people are not left right less and inevitably poor, we are not drowned under an impossible weight of interest bearing debt (most of our debts would be interest free) and it might even offer resistance against the boom-bust business cycle, if banks are deprived of some of their power to create a glut of money one minute and then a dearth of it the next The conclusions that we reach here are therefore that, contrary to the argument provided by Chick (1986), money did not become endogenous over time In fact, money has always been endogenous because of the necessarily triangular relationship involving a payer, a payee and a record keeper, even in those ancient times when money's functions were carried out using a precious metal or, more generally, a given commodity; and this with or without the existence of ‘banks’ 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