1. Alternative principles of PK monetary economics
Horizontalists versus Verticalists

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

3. i Ms Ms Ms M
Monetarists
Verticalists
Structuralists
Horizontalists

4. 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

5. 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

6. 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)

7. 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

8. 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

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

10. 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

11. 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)

12. 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.

13. - (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)

14. 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