Abstract
The traditional view of the bank money-creation process relies on the bank reserves-deposits relation. Central banks are posited to be able to control the quantity of bank deposits, and thereby the money stock, by determining the size of the high-powered base. Since commercial banks have an incentive to economize on holdings of excess reserves, the long-run ratio of bank reserves to deposits ordinarily is fairly stable. As a result it is a simple matter to determine the deposit-reserve multiplier. The argument seems both plausible and convincing. Introductory students of economics are taught how central banks, through open-market operations, affect increases or decreases in bank reserves to control the quantity of bank deposits. But its apparent simplicity should perhaps really make one suspicious. If it is so easy for central banks to control the rate of growth of monetary aggregates by controlling the supply of bank reserves, how do we explain the recent failure of monetary targeting throughout the entire western world?
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Monetary theory is less abstract than most economic theory; it cannot avoid a relation to reality, which in other economic theory is sometimes missing.
—Sir John Hicks, Critical Essays in Monetary Theory.
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Moore, B. (1985). Wages, Bank Lending, and the Endogeneity of Credit Money. In: Jarsulic, M. (eds) Money and Macro Policy. Recent Economic Thought Series, vol 5. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-7715-1_1
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