The so-called endogeneity means that the variable is determined endogenously, that is to say, the money supply is determined by factors such as interest rate and is a parameter in the equation. Through other variables of the equation, an average value is formed endogenously, which belongs to the dependent variable.
The so-called externality is external determination, that is, it is determined by independent variables and external factors (not the controlling factors in the equation) and does not change with the changes of variables in the equation.
For example, the early Keynesian school thought that the money supply was exogenous and the central bank could control the money supply, so the monetary policy was effective. Although the monetary school has different views, it also believes that the money supply is exogenous.
Later, Moore's horizontal money supply theory thought that money supply was endogenous.
Specifically, the endogeneity and exogeneity of money supply are not just an equation. Mainly consider the role of the market on the currency. Traditional economic theory holds that money is exogenous. In order to help you understand endogeneity, I recommend something to you and copy and paste it directly below. Please refer to it yourself.
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Questions and Answers on Modern Monetary and Financial Theories (6)
Seventy, explain the basic model of Weintraub-Caldo.
Weintraub's wage theorem is the basis of this model. According to this theorem, the commodity price is determined by the sum of labor cost and some kind of additive, namely
P=K(W/Q)
Where k represents the degree of monopoly determined by the exogenous institutional environment in which the enterprise operates, and the ratio of nominal total wages (W) to actual output Q is the unit labor cost of all output. By dividing L (total labor income) by W and Q, we can get the following equation:
P=K(w/A)
Where W is the average annual wage rate calculated in nominal money, and A is the average labor productivity (Q/L). Assuming that the growth rate of labor productivity is relatively stable and the relative growth rate of nominal wage rate exceeds the average growth rate of labor productivity, (w> prices will rise. Therefore, using common symbols, it can be written as:
P=P(w)
Among them, W is determined by collective bargaining, that is, price is a function of nominal wage, and the two are positively related, and any excessive increase in wage rate (W >；; A) it will lead to an increase in prices. Because the price is composed of unit labor cost and stable addition, the direct impact is that for any given actual output level (Q) and corresponding employment level, the nominal income (Y) will increase in proportion. Because nominal income is equal to the general price level multiplied by the actual output (y = p× q), under the condition of fixed q, wage changes affect prices, and price changes affect nominal income, and the increase of nominal income is directly proportional to the increase of prices. Under the condition that y determined by money supply remains unchanged, the rise of wages and prices can only be the decline of output, and employment as a variable that determines output will also decline accordingly. Obviously, the only way to avoid rising unemployment rate is to increase the money supply. Of course, the central bank can continue to implement its established money supply plan, but, in Weintraub's words, it will be "at the cost of unemployment and human suffering". That is to say, the money supply can only increase to the point where the nominal wage growth rate exceeds. This is Weintraub's endogenous theory of money. As long as the price level is mainly determined by wage negotiations outside the control of the central bank, the monetary authorities can only ensure sufficient money supply at most to remove financial obstacles that hinder full employment and economic growth, and the monetary authorities do not have effective means to control the price level.
71. Explain nicholas kaldor's basic model.
As a variant of Weintraub model, Caldo model holds that the basic duty of the central bank is to act as the lender of last resort and ensure the solvency of the financial sector through the discount window. This makes the central bank sit on an explosive barrel. In order to prevent the credit crunch from causing disastrous debt crunch, the monetary authorities have no choice but to meet the "transaction demand". Because the monetary authorities can't accept the disastrous consequences of the collapse of the banking system. Caldo's point of view shows that under any interest rate level set and maintained by the central bank, the elasticity of the money supply curve is infinite, that is, the money demand creates its own supply, so the money supply can completely meet the economic demand for money. Caldo first developed this special form of endogenous money supply theory.
Caldo's point of view is shown in figure 12-4. There is a horizontal money supply curve SM at every possible interest rate point, because if the central bank wants to play the role of "lender of last resort", it can only meet all the money demand at the established interest rate level. Money demand D is a function of nominal income, and the negative slope of D(Y) indicates that the more nominal income, the greater the money demand. The causal relationship here is not that M determines Y, but that Y determines M, because Caldo assumes that the government has established a permanent income policy to effectively protect the public's income level, and the corresponding price is a constant, so the D(Y) curve shows that the higher the corresponding actual output and employment level, the greater the nominal demand for money, and vice versa.
At point A, the money demand M 1 completely corresponds to the money supply with the interest rate i 1. Assuming that the actual output does not reach the equilibrium of full employment at this time, the central bank will lower the interest rate to i2 at the request of the government, which will cause the equilibrium point to move from A to C along D(Y), and the money demand will also move from M 1 to M2 along the horizontal axis. As the lender of last resort, the central bank can only passively agree to increase the money supply (BC). At point C, the money supply and the money demand reach a balance again. From the dynamic process, the money supply curve and D(Y) are the same curve, because D(Y) intersects with every possible SM line, and its intersection actually occurs on D(Y), and D(Y) also becomes the dynamic trajectory of money supply, thus creating money supply for money demand.
72. What is the impact of the increase in money demand on endogenous monetary model?
The endogeneity of Winterlaub and Caldo's money supply is mainly reflected in the helplessness of the central bank in the face of its pressure.
Starting from the equilibrium point A in Figure 12-5, it is assumed that wage negotiation increases labor cost, nominal wage exceeds average labor productivity (w > A), and price level and nominal income level (given actual income level) increase. The increase of nominal income level (assuming that the actual output remains unchanged) means that the money demand curve moves from D(Y) to D'(Y) or is parallel. Corresponding to the initial interest rate i2, the money demand M2 is greater than the money supply M 1, and the difference between them is the moving range of D(Y). Only by raising the interest rate to i3 can the central bank eliminate this excessive demand for money. However, this will lead to a decline in the actual output level and employment, so that the demand for money will return to the original level, and the supply and demand of money will reach a balance again at point C.
Constant. At this time, the money supply is still an exogenous variable strictly controlled by the central bank. However, it will be transformed into endogenous variables through Weintraub's so-called central bank's obedience to "politics" and its corresponding "supporting actions", as well as the role of the Central Bank of Caldo as the lender of last resort.
Seventy-three, the main limitations of the two endogenous monetary theories
First of all, Weintraub's endogenous money supply theory assumes that government leaders will not allow economic deviation, even a slight underemployment. This is actually a liberal fantasy.
Secondly, in the Winterlaub and Caldo model, the assumption that the central bank can only meet the money demand is not sufficient. Because the central bank has never taken fully meeting the demand for money as its policy goal, it can refuse the request of the administrative authorities to increase the money supply to some extent. Although it may not be sufficient, it is enough to make the money supply curve tilt upward, not a horizontal line.
Third, the velocity of money circulation is not only constant, but even its functional form is unstable. These are the important conclusions of Winterlaub and Caldo respectively, but this is not the case.
Finally, the influence of the change of money circulation speed and interest rate in the same direction has not been fully discussed. If the increase of interest rate and the acceleration of money circulation speed mean the decrease of money demand or even money supply, then according to endogenous money theory, the money supply curve is not horizontal, but positively related to interest rate, and the actual situation is precisely that interest rate and money circulation speed change in the same direction.
74. What is the new expression of endogenous monetary theory?
In view of the insufficient response of the increase of money supply to the increase of money demand, the endogenous money theory gives a new expression to the Weintraub-Caldo model, which actually recognizes that the money supply curve is horizontal only under certain conditions. As shown in figure 12-6, if the money supply remains unchanged, the interest rate will rise from i8 to i20, and if the interest rate remains unchanged, the money supply will increase to m'. However, in fact, both the interest rate and the money supply will change, because the central bank wants to avoid serious debt contraction, it will increase the money supply, and the rise of interest rate will also stimulate financial innovation and speed up the money circulation. As a result, SM'' will intersect D'(Y) somewhere between B and E, and the interest rate will rise to i 12. The money supply curve is neither as vertical as the traditional theory thinks, nor as horizontal as the post-Keynesian emphasizes.
75. What is the policy implication of endogenous monetary theory?
Such a revision of the endogeneity of money supply still shakes the foundation of monetary policy implementation, because the increase of money circulation speed offsets the role of monetary policy. Even if the central bank controls the money supply, due to the acceleration of money circulation, it still cannot effectively stop the rise of prices, but economic growth will be affected. Moreover, because financial innovation is sensitive to tight monetary policy, only the monetary policy that is severe enough to make the economy seriously decline can offset the accelerated circulation speed of financial innovation. If there is no effective income policy and full employment fiscal policy, financial innovation will lead to the change of the circulation speed of monetary income, thus weakening the control of monetary policy on credit flow, thus leading to the failure of monetary policy in line with Keynesian and monetarist theories. Traditional monetary policy tools, such as open market operations, discount rates and reserves, are also outdated because they cannot offset the impact of financial innovation.
How does Moore explain the endogeneity of credit money?
Moore divided money into commodity money, government money and credit money. Commodity currency refers to the currency that evolved from various physical objects and finally embodied as gold. Government currency is the currency deposited in circulation by the government issuing bonds. The supply of commodity money is determined by the production cost of commodities; Government money is issued for the government to make up the fiscal deficit, so the government's interests determine the supply of government money; In the early days, the exchange rate between credit currency and gold coins was fixed, and its supply was subordinate to commodity currency. Because the supply of these currencies is not directly related to their demand, the money supply curve is a vertical line that has nothing to do with the change of interest rates, and commodity money is exogenous. Credit currency is a variety of circulation and deposit certificates issued by commercial banks, which is formed in the loan issuance of commercial banks, and the loan issuance depends on the public's demand for loans, so the supply of credit currency is not independent of the demand for credit currency. Although the supply of credit money is also affected by the central bank's monetary policy, it is impossible for the central bank to refuse the loan requirements of commercial banks at a given loan interest rate level, and the loan scale of commercial banks is also determined by the public's loan demand. Therefore, the stock of money in circulation ultimately depends on the public's loan demand, which is the endogenous nature of credit money. In other words, at a given interest rate, the central bank can meet the demand for money indefinitely, which is the origin of Moore's horizontal money supply curve.
77. How does Moore explain the endogeneity of the base money supply?
Moore believes that the central bank cannot completely decide its own debt certificates? The supply of base money. Because the object of treasury bonds trading with the central bank is commercial banks, and the funds purchased by commercial banks are converted from their existing securities or commercial loans, and this conversion is not easy. Because, limited by the production cycle of enterprises, it is difficult for commercial banks to recover loans in advance; It is also difficult for the central bank to significantly reduce the price of government bonds and attract commercial banks to buy them, because the rise in interest rates on government bonds will become a heavy burden for the government. Although the central bank can raise the loan interest rate and deter the loan demand of commercial banks, it cannot prevent commercial banks from seeking the supplement of the base currency from the discount window. Although theoretically, the central bank has the right to refuse to offer discounts, such refusal will not only cause heavy political pressure, but may even endanger the liquidity of the banking system. In other words, the central bank cannot issue bonds according to its own wishes, increase the supply of base money, and even lack effective means to urge commercial banks to buy government bonds. In this sense, during the boom period, the rate of return on assets and loans of commercial banks increased, which reduced the price of national debt and stimulated commercial banks to buy national debt. During the depression, the interest rate is too low, and the opportunity cost of holding excess reserves by commercial banks is close to zero. They will not easily convert profitable loans and securities into unprofitable excess reserves, or even if this conversion occurs, it is difficult for the increased base money supply to form new loans. In other words, it is difficult for the central bank to move against the economic trend as the traditional theory says.
78. How does Moore explain the self-sufficient base currency of debt management?
Moore pointed out that since the 1960s and 1970s, the main source of funds for American commercial banks has changed from taking deposits to issuing financing instruments directly in the financial market. This kind of bond that can be listed not only has the advantages of short term, fast liquidity, convenience and reliability that many commercial loans do not have, but also changes deposits into loans, that is, commercial banks that need funds can start at any time according to economic goals and capital needs. Moreover, with the issuance of negotiable certificates of deposit and the popularization of related liability management, various economic units have also issued a large number of financing instruments, which has prompted large commercial banks to become more and more like brokers connecting both sides of capital demand, rather than financial intermediaries in the traditional sense, so the endogeneity of money supply is more obvious. Because commercial banks are competing enterprises, loan issuance is almost entirely driven by the monetary demand of enterprises, and commercial banks can only be in a passive compliance situation. In addition, debt management can also be that commercial banks do not sell government bonds at low prices and directly issue marketable certificates of deposit. In addition, almost all financial instruments that can be listed are not directly controlled by the central bank, which makes commercial banks less dependent on the central bank than ever before. Moreover, with the extension of the term of various listed financial instruments, the liquidity of assets held by commercial banks tends to further decline, which further urges commercial banks to seek the supplement of the base currency in the market without worrying about the central bank tightening monetary policy.
Seventy-nine How does Moore explain the endogeneity of bank role transformation and transmission?
Moore divided the financial market into wholesale market and retail market. The wholesale market is the financing market of commercial banks, and the retail market is the lending market of commercial banks. In the wholesale market, commercial banks are the recipients of loan conditions (interest rates) and the decider of loan quantity; In the retail market, commercial banks are the deciders of loan conditions (interest rates) and the recipients of loan quantity. Due to the change of the role of commercial banks in these two markets, the public's money demand is directly transmitted to the central bank, prompting it to increase the money supply according to the money demand.
80. Illustration of Moore's point of view
Moore's point of view is shown in figure 12-7. The vertical axes DR, LR and WR represent the deposit and loan interest rate of a single commercial bank and the wholesale market interest rate of funds respectively, and the horizontal axes L and D represent the deposit and loan amount. In the capital retail market, the loan demand of commercial banks is also bonds issued by commercial banks in the primary market, which is characterized by the curve of D0=L0, and the demand for deposits is the cash supply of the public, which is characterized by the curve of DDDD. Once the bank determines its own loan interest rate (LR) and deposit interest rate (DR), the bank's credit supply becomes horizontal LRLR, and the bank's deposit supply also becomes horizontal DRDR, and the loan demand and deposit supply are equal to (. The wholesale interest rate is WR, and the demand or supply of funds in the wholesale market is expressed by the horizontal line WRWR. MRL and MC respectively represent the income of a specific lender and the marginal cost of capital. The intersection of the two is on the wholesale interest rate WR, when the deposit is equal to the loan, that is, D = L.
If the credit demand of the banking system increases, additional deposits can be created accordingly, which leads to an increase in supply, that is, the deposit demand determines the deposit supply, and the loan demand of the banking system determines the loan supply of the banking system. As shown in figure 12-8.
As shown in the figure, the demand for loans and deposits moves to DL' and DD' to the upper right and lower right respectively, forming new loans and new deposits, that is, D'=L', so the demand for deposits depends on the supply of deposits. If the loan demand increases, the central bank will raise the refinancing rate, and the wholesale interest rate of funds will rise accordingly, that is, from WR0 to WR 1, which will lead to an increase in the marginal cost of bank funds, and the demand for funds in some wholesale markets will shift to the retail market, which will lead to an increase in loan demand, that is, from D'L to D' L, and at the same time, bank deposits will decrease with the increase in loan demand. D'D will move to D' D. Because both borrowers and lenders have to adjust their asset structure and issue new financing instruments, a new balance will be restored at a higher interest rate level, and the balance of deposits and loans will reach (D' = L'), and the bank will realize the original loan income, that is, (LR0-DR0 = LR 1-DR 1).
Moore's image proves that with the emergence of debt management and the development of the federal fund market and eurodollar market, credit instruments are issued for commercial banks to meet the sudden and unexpected increase in loan demand at any time. Because loans can create deposits and commercial banks can obtain the required base money at any time, the central bank can only control interest rates, but not the amount of money. Because commercial banks connect the wholesale market and retail market of funds, the money supply is ultimately determined by the money demand.
Eighty-one, briefly describe the criticism and counter-criticism of levelism.
Many scholars think that Moore's analysis and research are unique, but they also think that it also has shortcomings. As goodhart said, Moore overemphasized that commercial banks can only passively meet the loan demand of borrowers. Too much emphasis on the importance of debt management. Inverted the causal relationship of the decline in current assets. Moore gave a clear answer to goodhart's criticism. He still insists that individual commercial banks can only passively meet the loan needs of borrowers. Although they can decide the issuance of each loan, just as manufacturers can decide the model and quantity, the production and supply of vehicles are ultimately determined by market demand. Moore also believes that although the endogeneity of money occurred before the appearance of debt management, the influence of debt management should also be included in the theory of endogeneity of money. Because money supply theory should develop with the evolution of history, relevant theories should be decided and changed by history.
How does Moore explain that money demand creates money supply?
Moore believes that whether it is a single economic unit or the overall economy, money demand can automatically create money supply, including requiring the central bank to increase the base money supply. Because non-bank economic units use accumulated money over the years, or borrow money from commercial banks to balance the difference between their expenditure and income, commercial banks will issue new financial assets to balance them, and these assets will eventually be purchased by money created by other commercial banks. Even the deficit expenditure can be met directly through the creation of credit currency by commercial banks, without using the previous balance. As long as the bank currency maintains its currency, that is, as a generally accepted means of expenditure, it can be used to pay for the purchase of goods. Therefore, the loan demand for the banking system forms the loan of the banking system. The demand for credit money determines the supply of credit money. Although the currency creation of commercial banks should be based on and restricted by the currency of the central bank, as mentioned above, it is difficult for the central bank to refuse the requirements of commercial banks, and commercial banks can also obtain the basis for currency creation in the international financial market.
How does Moore explain that interest rate is an exogenous policy variable?
In traditional theory, interest rate is determined by the supply and demand of money. Moore believes that the interest rate is an exogenous variable directly determined by the central bank, because once the central bank determines the interest rate for providing loans to commercial banks in the short term, it can neither demand nor refuse loans from commercial banks, so the money supply is not directly determined by the central bank, but determined by the money demand of economic operation. Moreover, the loan interest rate of the central bank is the short-term loan cost of commercial banks, which directly determines the short-term loan interest rate of commercial banks, and determines the long-term interest rate through the expectations of financial market participants for future short-term interest rates. Therefore, the interest rate level is the result of the direct decision of the central bank, not the market phenomenon determined by the supply and demand of money. Therefore, the money supply curve is not a vertical line, but a horizontal line. The central bank does not need and cannot influence interest rates through changes in the money supply. If the central bank changes the loan interest rate, it will cause the money supply curve to move in parallel, not vertically. The central bank still allows interest rates to fluctuate within a certain range. All countries in the world have a history of negative real interest rates, which is the best empirical proof that interest rates are not determined by market supply and demand. The exogenous determination of interest rate will inevitably lead to the exogenous determination of exchange rate.
84. How does Moore explain that interest rate adjustment is the main policy tool?
According to Moore's theoretical logic, the central bank cannot control the money supply, and interest rate is not only an exogenous policy variable, but also the key to determine the deficit expenditure level of all economic units and other economic variables. Adjusting interest rate means adjusting the deficit expenditure level of economic units, that is, adjusting the money demand and then adjusting the money supply. Although Moore conditionally agrees with monetarism to control the money supply to deal with inflation, he still believes that inflation is not an excessive money supply, but an excessive increase in money demand, so raising interest rates should still be the main way to control inflation.
Eighty-five, the policy enlightenment of endogenous monetary theory to China.
According to the concept of endogenous money, China's money supply has a strong endogenous nature, which is manifested in the reverse mechanism of money supply. It occurs not only in the process of money supply, but also outside the process of money supply. For example, the difference between deposit and loan determines the issuance of money, which is the self-realization of money demand in the money supply mechanism; The order of the administrative department to increase the money supply is the compulsory realization of the money demand outside the money supply mechanism. Of course, this is fundamentally different from Moore's financial innovation that weakens the central bank's macro-control ability. Weintraub-Caldo's political and policy pressures are also very different from those in our country. For example, wages in our country are not determined through negotiation. In view of the fact that Weintraub-Caldo generally reflects the monetary banking system 77 years ago, while Moore's theory reflects the situation 88 years ago, the transition of China's money supply mechanism is bound to approach Weintraub-Caldo's description first, and then enter Moore's discussion. Because China's financial reform is gradually eliminating the endogeneity of money supply, such as cash issuance determined by the difference between deposits and loans, economic organizations at all levels can no longer directly affect the central bank's money issuance with their money receipts and payments; At the same time, China's administrative authorities have learned from other countries' experiences and lessons, and do not easily exert political and policy pressure on the monetary authorities; Moreover, due to the different administrative systems, China has no political and policy pressure as Weintraub Caldo said; In addition, China has always prevented institutions at all levels from "having policies at the top and countermeasures at the bottom", so it is difficult to form a prerequisite for private financial innovation as Moore said. Therefore, China's money supply will not soon form the endogenous money supply mechanism that Moore has long said. However, China still has a special endogenous money supply mechanism in the transitional economy, such as increasing the money supply for stability. At the same time, China's financial market and international financial market will inevitably produce anti-regulatory financial innovation. Especially after China's entry into WTO, Moore's endogenous money supply will appear in China sooner or later. This requires us to correctly judge and analyze the endogenous money supply mechanism in the transitional economy and take various measures to reduce its control to a minimum; We should also fully understand the endogenous trend of money supply and the inevitability of weakening the macro-control effect of monetary policy, and start thinking about preventive countermeasures as soon as possible. At the same time, the endogenous money supply theory also tells us that the control and regulation of money supply should be transferred to the control and regulation of interest rates, that is, the two-pronged approach should be taken first, and then gradually transferred to interest rate control as the mainstay, supplemented by money supply regulation.