ABSTRACT OF PAPER
Title: Endogenous and exogenous elements of credit money
Author: Dejuán Óscar
The postKeynesian hypothesis of endogenous money provides a sound criticism to the neoclassical exogenous money theory and leads to quite different policy conclusions (Moore, 1988; Wray, 1998; Graziani, 2003). But the theory transmits a wrong idea: the passivity of banks. The last financial boom leading to the Great Financial Crash of 2007 illustrates the dangers of such idea. In a financialized economy, banks are able to create unlimited amounts of credit-money to finance the purchase of assets unrelated with current production (shares, bonds, gold, land, old dwellings…) Since these assets cannot be reproduced at ease, the impact of credit expansion will be the continuous formation of bubbles in the stock exchange and in the residential market. These bubbles damage the real economy both when they pump and when they burst. This is the cost of the financialization of the economy that should be controlled to avoid another major financial crash. In parallel, economists should work out new theories that combine in a coherent synthesis the endogenous and exogenous elements of credit-money. As Werner (1993, 2003) has shown, this task involves a fresh look to the old quantity theory of money. The first quantity theory introduced by late Scholasticism (16-17centuries) stated: Mg•Vg=PT•T where Mg is the stock of gold; Vg, its velocity of circulation; P, the average price level per transaction and T, total transactions whether they are related with output or not. Under monetarism, the quantity theory looks like this: Md•Vd=Py•Y. Here Md is the stock of paper-money, issued by central banks and multiplied by commercial banks (deposits); Vd, its velocity of circulation that it is supposed to be stable; Y, final output, fixed at full employment; Py, the GDP deflator. Notice that the transformation implies a fixed proportion between output and non-output transactions which is not true in nowadays financialized economy. Following Werner we split the quantity theory in two parts. The one corresponding to non-output transactions would be: Mc•Vc=PA•A, where Mc is credit-money for the purchase of assets; Vc, its velocity of circulation; A, a quantity measure of the stock of assets; PA, its price index.
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