Alternative principles of PK monetary economics Horizontalists versus Verticalists

Different sub-schools Post-Keynesians Horizontalists (Radical endogeneity) Structuralists Neo-classical school Monetarists IS/LM New Consensus

i Ms Ms Ms M Monetarists Verticalists Structuralists Horizontalists

Main features in monetary economics PK school Neoclassical Money Has counterpart entries Falls from an helicopter Money is seen As a flow and a a stock A stock Money is tied to Production Exchange The supply of money is Endogenous Exogenous Main concern with Debts, credits Assets, money Causality Reversed: credits make deposits Reserves allow deposits Credit rationing due to Lack of confidence Asymetric information

Main features, interest rates PK School Neoclassical Interest rates Are distribution variables Arise from market laws Base rates Are set by the central bank Are influenced by market forces A restrictive monetary policy Has negative effects in short and long run Has negative effects only in short run The natural rate Takes multiple values or does not exist Is unique, based on thrift and productivity

Reversed causation in PK economics Causality goes from credits, to money deposits, to reserves or high powered money Investment determines saving, and not the reverse The growth in money stock aggregates is caused by the growth in output and prices (price inflation is not caused by an excess supply of money)

Two kinds of financial systems, according to Hicks 1974 The overdraft financial system Firms are in debt towards commercial banks Commercial banks are in debt towards the central bank The auto or asset-based financial system Firms finance investment with retained earnings Commercial banks have large amounts of T-bills in assets

Overdraft vs Asset-based systems Overdraft systems 90% of the world financial systems Ignored by textbooks No control on HPM, except through credit control Clarifies how the monetary system functions In a sense, all systems are of the overdraft type: no central bank controls directly the supply of money Asset-based systems Only in some anglo-saxon countries Described by mainstream textbooks Based on open-market operations; is said to be efficient in controlling the money stock Puts a veil on the operating procedures of monetary systems

Simplified neoclassical view Central bank balance sheet Assets Liabilities Foreign reserves Banknotes Domestic T-bills Reserves of commercial banks

Central bank balance sheet Simplified PK view Central bank balance sheet Assets Liabilities Foreign reserves Banknotes Domestic T-bills Reserves of commercial banks Loans to domestic banks Government deposits

Central banks set a target overnight rate, and a band around it The new operating procedures put in place in Canada and other such countries are fully compatible with the PK monetary theory Central banks set a target overnight rate, and a band around it Commercial banks can borrow as much as they can at the discount rate There are no compulsory reserves and no free reserves (zero net settlement balances) The target rate is (nearly) achieved every day Central banks only pursue defensive operations, trying to achieve zero net balances: they try their best to supply the amount of balances demanded by direct clearers (mainly banks)

Why is the federal funds rate sometimes different from the target rate ? In Canada, the Bank is able to know with perfect certainty the demand for settlement balances. In the States, the Fed forecasts the net demand. Without reserve averaging, the federal funds rate would fluctuate widely between zero and the discount rate, as the set daily supply would be different from the given demand (two vertical curves). With reserve averaging, banks can speculate on future values of the federal funds rate, and get extra reserves when rate is low. The daily supply is still fixed, but the demand is interest elastic.

- (overdraft) Overnight rate Bank rate Target rate Rate on positive Operating procedures in Canada Overnight rate Bank rate Target rate Rate on positive balances Settlement balances - (overdraft) + (surplus)

Credit rationing when there is a reduction in bank confidence (Credit-worthy demand: demand with appropriate collateral: Cf. De Soto, and Heinsohn and Steiger) Interest rate Notional demand Credit- worthy demand i2 A B i1   Loans