Saturday, August 10, 2013

Empirical Evidence on Endogenous Money

The empirical and statistical evidence on the direction of causality from loans to deposits is given by these studies, which are surveyed by Howells (2006: 59–62):
(1) Moore, B. J. 1988. Horizontalists and Verticalists: The Macroeconomics of Credit Money. Cambridge University Press, Cambridge and New York. pp. 162–163.
Moore uses the Granger and Sims causality test on loans and measures of the US money supply from 1974 to 1980. Moore found unidirectional causality from lending to money supply aggregates.

(2) Palley, Thomas I. 1994. “Competing Views of the Money Supply Process: Theory and Evidence,” Metroeconomica 45.1: 67–88.

Palley, Thomas I. 1996. Post Keynesian Economics: Debt, Distribution, and the Macro Economy. St. Martin’s Press, New York.
Palley also used the Granger and Sims causality test, and had the same findings as Moore.

(3) Howells, P. G. A. and K. Hussein. 1998. “The Endogeneity of Money: Evidence from the G7,” Scottish Journal of Political Economy 45.3: 329–340.
Quarterly data from G7 from 1957/1977–1992/1993. With the use of the Phillips-Perron test, Howells and Hussein found that broad money is caused by loans, but there is some evidence also of reverse causality too from deposits to loans.

(4) Caporale, G. M. and Pittis, N. 1997 .“Causality and Forecasting in Incomplete Systems,” Journal of Forecasting 16: 425–437.

(5) Howells, P. G. A. and Hussein, K. A. 1999. “The Demand for Bank Loans and the ‘State of Trade,’” Journal of Post Keynesian Economics 21.3: 441–454.

(6) Caporale, G. M. and Howells, P. G. A. 2001. “Money, Credit and Spending: Drawing Causal Inferences,” Scottish Journal of Political Economy 48.5: 547–557.
This study confirms the general loan to deposit direction of causality, but with some feedback. There is also a role for money demand.
Some further empirical literature:
Pollin, R. 1991. “Two Theories of Money Supply Endogeneity: Some Empirical Evidence,” Journal of Post Keynesian Economics 13.3: 366–395.

Palacio-Vera, A. 2001. “The Endogenous Money Hypothesis: Some Evidence from Spain (1987–1998),” Journal of Post Keynesian Economics 23.3: 509–527.

Arestis, P. and M. Sawyer. 2003. “Does the Stock of Money have any Causal Significance?,” Banca Nazionale del Lavoro Quarterly Review 56.225: 113–136.

Shanmugam, B., M. Nair and O. W. Li. 2003. “The Endogenous Money Hypothesis: Empirical Evidence from Malaysia (1985–2000),” Journal of Post Keynesian Economics 25.4: 599–612.
Howells, P. 2006. “The Endogeneity of Money: Empirical Evidence,” in P. Arestis and M. Sawyer (eds.). A Handbook of Alternative Monetary Economics. Edward Elgar, Cheltenham, UK and Northampton, Mass. 52–68.


  1. I completely agree with the idea of endogenous money but I have this to say: the statistical study of causalities is not something I believe. My claim is to not to oppose endogenous money (obviously) but in fact the opposite.

    What I am saying is that the "causality tests" themselves are not the "truth" and are poorly formulated.

    Do you know any criticisms of these tests themselves?

    1. I'd have a look at criticisms of these tests. Do you have any references?

    2. Hi,

      This is an italian study of endogenous money in Eurosystem.

      "To sum up, loans influences M2 in the short run but this relationship does not exist in the long term. From the Granger causality test there is a one-way direction causality from M2 money multiplier (M2_B) to loans, from monetary base to loans and from industrial production index to loans. This implies that the Post-Keynesian view may not hold true in the case of Euro Area’s M2 money supply."

      But I'm not so good in econometrics to say something about. I think endogenous money is just more logic and confirmed by insiders.

  2. These studies appear to do no more than confirm that interest rate targeting works exactly the way all the texts books say that it does and that the CB will accommodate any reserve requirements at a given overnight rate.


    1. Rob Rawlings@August 10, 2013 at 6:51 AM

      (1) when have Post Keynesians ever denied that the central bank can control interest rates?

      (2) when have Post Keynesians ever denied that the central bank is usually forced to supply reserves to the banking system on demand, or cause liquidity problems to the banking system?

    2. This is new fashion Lord Keynes - claiming everything is there in neoclassical/mainstream textbooks.

    3. They haven't.

      It does seems though that a lot of what is described as endogenous money theory is just a description of how interest-rate targeting works. This system is more-or-less a pragmatic way of influencing the economy invented by a bunch of neo-classical central bankers. Post-Keynsians present it as if it provides some sort of deep insight into how money works that the rest of us are all missing.

    4. It is a deep and crucial insight and the mainstream's failure to grasp it has resulted in the mess we're in - globally - buried in both public and private debt.

      Monetary policy was viewed as a benign demand management tool that operated through mysterious "expectation" and "wealth" channels , when in reality it's almost entirely working through credit , building asset bubbles and debt bombs at the same time it was working its demand-management magic.

      Yes , the rest of you missed it badly , and many of you still don't get it. You'll be reminded of this cockup for many years to come.

    5. Interest-rate targeting is usually explained by mainstream as a consequence of the instability of monetary aggregates and of its relationship with inflation. They think that more stable monetary aggregates and absent price rigidties would prevent the Friedmanite model to fail, and New Consensus Model were developed after many central bankers were already using interest-rate-targeting.

      Post-Keynesians, in contrast, do have a theory about the necessity of interest-rate targeting in capitalist economies, and they have started to talk about it when the Friedmanite model were fashionable.

  3. In this work there is an alternative proposal for testing endogenous money by means of the actual statistical definition of endeogeneity