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Subscriber sign in You could not be signed in, please check and try again. Username Please enter your Username. Password Please enter your Password. Forgot password? Don't have an account? Sign in via your Institution. Theoretical framework: the monetary circuit theory Monetary circuit theory is both a credit, money and production theory but also a profit and repartition theory. Money is the core of such analysis in a monetary economy of production.
Circuit is defined by Parguez as monetary flows treated on a hierarchical basis. Moreover, circuit is a sequential dynamic approach, i. Besides, monetary circuit theory is based on a division of the society between classes with a specific agent hierarchy connected to each other by flows. This system includes six economic agents: firms, commercial bank, the Central Bank, households, the government and the rest of the world. Such division of the society between various groups helps us to understand the role of income distribution played by the money.
We focus more particularly in this study on three main pillars of monetary circuit theory4: money endogenous, investment causes saving and the Keynes-Kalecki identity. Indeed, when economic units borrow from banks, deposits, and, therefore, bank money are created ex nihilo Aglietta, , p. Such flow of money is endogenous because it results from the credit necessary to firms to realize their production plan: this is the so-called Keynes finance motive , xiv, p.
Besides french circuit school, it exists a circuit italian school with Graziani , 85, 89 and 90 , Messori or Bellofiore In other words, production makes the endogenous nature of money. Moreover, we can notice that when the loans are repaid, deposits are destroyed. Endogenous money supply implies that causality runs from bank lending to bank deposits. In these conditions, central banks have no control over total borrowings and hence money stock. However, endogenous money concept conduced to several debates between Palley and Basil Moore concerning the endogenous nature of money supply and its mechanisms.
Thus, Pollin identified three distinct approaches among postkeynesian theory: the accommodationists view, the structuralist view and the liquidity preference view. Accommodationist view argues that the central bank accommodate the demand for reserves and sets the cost of short-term liquidity through the overnight interest rates. Commercial banks then set their loan rates as a mark-up over these rates and attempt to meet all borrower demands for bank loans.
This implies that money supply is determined by the demand for bank loans. Loans create deposits, and loans are determined by creditworthy bank borrowers. Bank loans are both a financial asset and liability to the banks. Banks meet loan demands with deposits. When borrowers demand bank loans, deposits are created. When loans are repaid, deposits are destroyed. Net bank lending allows economic units to deficit-spend and hence stimulate aggregate demand.
The rates charged on loans and deposits, therefore, affect the growth of money and aggregate income Moore, Changes in money income cause the change in demand for bank loans, which in turn affects monetary growth. Similarly, bank loans create deposits, which in turn are used to finance increases in aggregate demand Kaldor and Trevithick, Moore argues that the central bank must and always accommodate bank demand for reserves and currency, to fulfill its responsibility of preserving financial system liquidity.
The central bank sets the reserve requirements and short-term rate. Thereafter, the quantity of reserves it supplies becomes completely endogenous, determined by the quantity of reserves demanded by banks to support their lending and deposit-taking activities. The central bank has no control over total reserves, but merely alters the mix of borrowed and non-borrowed reserves to achieve its interest rate target Moore, , pp.
To sum-up, with the accommodationist view, the monetary authority is only able to control interest rates but not the supply of reserves. As a result, the money supply function is perfectly interest rate elastic Moore, , p. The structuralist view to endogenous money considers that the central bank does not fully accommodate reserves demand by commercial banks.
As bank lending increases, demand for reserves will rise. But, according to the structuralists, the accommodation from the central bank will only be partial, and hence interest rates are raised in the process Palley , p. Indeed, structuralists argue that the central bank retains some control over the supply of reserves.
According to Palley , p. The liquidity preference view accepts the core of the money endogeneity thesis. However, they consider that credit money can be in excess supply Howells, , p. Thus, by using the money demand argument, Howells suggests that if the supply of deposits is insufficient to match the demand for loans, individual preferences will change relative interest rates, thereby raising the supply of deposits and reducing the demand for loans.
He concludes that variations in relative interest rates must continuously occur in order to ensure that the demand for newly created deposits marches net new loan demand by borrowers Howells, , p. According to Arestis , p. When money is distributed under income form and then spend, such money can be used to pay households consumption and the firm investment.
At this moment only, money can be saved: money created initially by the credit offered to firms, is recovered under sale form, but if a part of incomes is saved by households, firms cannot recover the totality of money that they borrowed and they cannot reimburse entirely the credit offered.
As a result, firms must be indebted with households financial savings and banks amount of saving that households keep under liquid form of deposits. In these conditions, it appears that investment created its proper saving, without a necessary adjustment of interest rate.
According to Parguez , pp. In other words, investment decided by firms determines the saving amount5. To invest, it does not necessary to have saving or deposits before.
As a result, investment is never limited by saving shortage. To sum-up, circuit theory postulates that investment governs savings; the profit share in the national income is the main regulator. It results from it a hierarchy between agents because firms decide via the investment about the wage, profits and employment level, and when such investment is accepted by banking system, household must adapt to this.
Such relationship between investment and saving was specified by numerous authors6. Such identity is always valid ex post for the final financing. The identity reveals that if an economic sector has a net lending financial position, another sector will have a net borrowing financial position.
As a result, the hierarchy between the different sector in the circuit explains the causality inside the Keynes-Kalecki identity running from the right side of the identity i. Macro-financial developments of Slovakia: descriptive analysis Our descriptive analysis is based on three elements: an overview of the main economic indicators, the Keynes-Kalecki identity and the creation of money by banks.
Such results were notably conducted by external and domestic demand household consumption, private and public investment. Indeed, since a mechanism of growth led by demand side can be identified7. On the contrary, the low level of growth in the year was caused by the structural adjustment chosen by the central authorities to control budget and current account deficits.
Moreover, according to Beblavy , Slovakian monetary policy between and can be characterized such as a target inflation policy. Indeed, even if the exchange rate is officially floating since , it plays an important role NBS, Thus, the National Bank of Slovakia NBS intervenes on exchange rate markets in order to reduce the excessive volatility of the koruna against the mark then the euro between and and to fight against appreciation pressure on the koruna since to Indeed, Slovak authorities were worried by the fact that Slovak competitiveness can be affected negatively by the rapid koruna appreciation.
These last years, Slovak koruna was substantially appreciated against the euro Egert and Lommatzsch ; Toth et Chudik, Such appreciation was conducted par the rapid productivity growth resulting from high FDI inflows, notably in the car sector.
In these conditions, the NBS reduced many times interest rate and intervened on the exchange rate market notably in in order to contain the appreciation pressure on koruna. Such central bank interventions made the koruna stable. On the external side, the current account deficit is financed by the inflows of FDI.
The recent buildings of new factories accelerate exports and contribute to ameliorate payment balance. A first period corresponded to the post-transition years with an increasing budget deficit and bank profits net lending position whereas the net lending household financial position decreased. Finally, non-financial corporation, after a net borrower position from 96 to 98, obtained a net lending position in and The second period corresponds to the pre-EU adhesion with a decreasing budget deficit and bank net lending position in and whereas non financial corporation and household indebtedness were increasing; bank profits net lending position were reduced in and Monetary process of creation in percentage Slovakia Money Money commercial Central bank bank 94,34 5,65 95,33 4,66 37,35 62,64 72,17 27,82 ,10 ,10 86,63 13,36 Source: author calculations The calculation of the share of commercial and central bank in the monetary process creation8 reveals that over the period , monetary creation comes mainly from commercial bank, except in Such information confirms the monetary circuit theory where money is created ex nihilo.
Econometric results about endogenous money and the causality between investment and saving 4. In these conditions, our econometric causality test must reveal a unidirectional causality from the total commercial bank loans LL to the monetary base Lb and the M3 money supply LM3. The structuralist view can be considered a mixed model since it mixes some features of the orthodox monetarist approach causality from the base [Lb] and the M3 money multiplier [Lm] to total bank loans [LL] because they suggest that central bank retain some control over the supply of reserves Palley, and Pollin,
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