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. HorizontalistsandVerticalists: TheMacroeconomicsofCreditMoney. 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 KeynesianEconomics: Debt, Distribution, andthe 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,” ScottishJournalofPoliticalEconomy 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.

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