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The financial crisis of 2007-2008 triggered monetary policy designed to boost nominal demand, including Quantitative Easing, ‘Credit Easing, ‘Forward Guidance and ‘Funding for Lending. A key aim of these policies was to boost the quantity of bank credit to the non-financial corporate and household sectors. In the previous decade or more, however, p...
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... credit-market in the 1980s enabled households to borrow against the value of their homes -via home equity withdrawal -for consumption smoothing purposes (Muellbauer, 2002). House-price inflation is also thought to have asymmetric 'wealth effects' which will also stimulate consumption (Goodhart and Hofmann, 2008;Aron et al., 2012). 11 As shown in Fig. 2, there was a rapid rise in household lending as a proportion of GDP from the 1980s in contrast to lending to the private non-financial sector. Fig. 1 demonstrates the growth rate of lending to households is considerably smoother than lending to private non-financial corporations, supporting the idea that it plays an important role in ...
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... Patrick (1966) suggests two study hypotheses for identifying the causal association between growth and finance: (1) the supply-leading hypothesis that represents growth is finance-oriented, (2) the demand-following hypothesis, wherein the financial markets are output oriented. Other researchers, like (Ryan-Collins et al., 2016) and (Werner, 1997(Werner, , 2005(Werner, , 2012(Werner, , 2013(Werner, , 2014a(Werner, , 2014c, show empirical and theoretical contributions to the supply-leading hypothesis. Werner (2005) considers merely experiential contribution to the supply-leading hypothesis because of the persistent small-side principle and disequilibrium, credit markets are rationed by the supply (Jaffee & Russell, 1976;Stiglitz & Weiss, 1981) and the banks generating money supply over the credit expansions (Werner, 2014b(Werner, , 2014c(Werner, , 2016. ...
This research examines the linkages between trade, financial openness, and economic growth in China from 1992 to 2021, using Granger causality analysis in the ECM model to identify the trend of a causal relationship between the variables. The results confirm the validity of export-led growth and the supply-leading hypotheses in China. Moreover, China’s broad money is output-oriented, and the significance of exports to China’s economy is supported by the influence of real income and imports caused by exports. Lastly, the research highlights that domestic credit expansion by the banking industry stimulates global trade growth; however, import changes cause broad money fluctuations. Policymakers can utilize these findings to identify the trend of the growth and development of the trade and financial industry of the economy, as there is substantial proof that a meaningful relationship is occurring between economic growth, trade, and the financial development sectors of the economy.
... Werner (1997Werner ( , 2005Werner ( , 2012 developed his ideas including disaggregated traditional money quantity equation into the quantity theory of credit, which is based on the idea that money is primarily created by commercial banks and credit from banks is used also for transactions not included in GDP. Quantity theory of credit was empirically supported e.g. by Lyonnet and Werner (2012) and Ryan-Collins et al. (2016). ...
Research background: Endogenous money creation is an inherent feature of today?s economies and widely accepted phenomenon. As the various theories of money rely on the money quantity equation, most empirical research is heading towards the analysis of the two-way relationship between the quantity of money and nominal GDP. In today's world, with the extraordinary development of the financial sector, money is used not only for transactions in the real economy, but increasingly also for purchasing financial assets. This observation was absorbed by Werner in the quantity theory of disaggregated credit. Purpose of the article: The aim of the paper is to join the debate on endogenous character of money supply by tasting a disaggregated equation of money. It assumes that the domestic money supply is positively determined not only by growth in GDP-based transactions but also by growth in non-GDP-based transactions (financial transactions). Additionally, it is assumed that in the age of globalization it can be also positively influenced by the global liquidity. Methods: Testing of the above-mentioned hypotheses takes place with the use of panel unit roots tests, panel Granger causality test and panel estimations (OLS, models with fixed/random effects, GMM). In the study, annual data from 2002 to 2018 for OECD countries were chosen for statistical research. Findings & value added: The article confirms the hypothesis that real and financial economic activity together with global liquidity positively influence domestic credit and thus money supply. As the amount of money in an economy is driven not only by the real economy but also by the financial economy, prudential regulations that restrict leverage (and thus control the amount of credit) and limit risk-taking during price bubbles periods should be therefore considered. In the research, the reaction of domestic money supply to the changes in US money supply is positive. It confirms the importance of spill-over effect of expansionary policy in major economies to other economies.
... The supply-leading hypothesis is mainly confirmed via the role of banking credits. Further studies, such as those by Werner (1997Werner ( , 2005Werner ( , 2012Werner ( , 2013Werner ( , 2014a and Ryan-Collins et al. (2016), provide both theoretical and empirical support for the supply-leading hypothesis. Werner (2005) finds only empirical support for the supply-leading hypothesis due to pervasive disequilibrium and the short-side principle, the credit market being supply rationed (Jaffee & Russell, 1976;Stiglitz & Weiss, 1981) and banks creating money supply through loan extensions (Werner, 2014b(Werner, , 2014c(Werner, , 2016. ...
This study aims to confirm an empirical link between financial openness, foreign trade and income growth in South Africa. Although domestic credits, trade and growth are cointegrated, the findings indicate that no such link can be observed between money supply and exports as exports are a result of foreign demand and hence subject to foreign monetary factors rather than domestic financial development. The results of causality analyses reveal that the export‐led and supply‐leading hypotheses are confirmed for South Africa. Money supply in South Africa is also output driven. Finally, the study shows that changes in domestic credits precede significant changes in trade and growth in South Africa. As a result, this study suggests that the creation of domestic credits is a significant force behind trade and aggregate income in the region.
... , in a study of 46 economies in the period 1990-2011, found a negative relationship between economic growth and the stock of bank lending to domestic real estate, but positive income growth effects of credit flows to non-financial business. Similar results were reported in studies of single countries, including Japan (Werner, 1997), Spain (Werner, 2014), the United Kingdom (Ryan-Collins et al., 2016) and the United States (Bezemer, 2014). Mian et al. (2015) study 30 countries in the period 1960-2012 and find that an increase in the ratio of household debt to GDP over three years predicts lower subsequent GDP growth and higher unemployment. ...
The decline in the share of bank credit to non-financial firms since the 1990s, relative to credit for real estate and financial asset markets, has raised concerns over economic growth and financial stability and sparked renewed interest in credit policies, instruments and institutions. We examine their theoretical case and post-war use, and trace their demise during the wider market-oriented policy reconfiguration from the 1980s. Notably, this included home ownership polices favouring mortgage markets. We then examine the empirical relationship between credit policy and credit allocation in the 1973–2005 period for 17 advanced economies. Taking account of co-integration, we present evidence that the decline of credit policies is significantly associated with a lower share of lending to non-financial firms. It may be worth revisiting the potential of credit policies to support adequate financing for goals such as innovation, industrial development and the transition to a low-carbon economy.
... FDI can solve the problem of foreign debt accumulation in developing countries and also increase per capita income. Excessive dependence on foreign debt can be associated with enormous risk and can hamper the growth of developing countries [19]. The factors influencing foreign capital entry are from external debt to Gross Domestic Products for the short and long term, and have a negative impact between the ratio of debt to GDP to FDI. ...
This study aims to examine the influence of macroeconomic indicators and infrastructure spending on foreign direct investment (FDI) in the period 1981 to 2018. This study uses a quantitative approach. The sample in this study is macroeconomic variables, which include gross domestic product, inflation, debt to GDP ratio, interest rates, exchange rates, and infrastructure spending in the 1981 to 2018 period. The analysis technique used is cointegration and error correction modeling. The analysis shows that gross domestic product, inflation, debt to GDP ratio, interest rates, exchange rates, and infrastructure spending have a long-term and short-term relationship to FDI.
... The global financial crises created evidence that the analytical models of the Great Moderation fundamentally failed to capture the changing nature of financial intermediation and the complex business of transnational banks lending across different economic sectors, some contributing to GNP, others not (Ryan-Collins, Werner, and Castle 2016). Only the central bank 12 and banks reconcile transactions directly via the central settlement system with newly created credit and money. ...
The incentives banks face, such as the Basel Capital Accords, motivate them to favor lending with collateralized assets, rather than lending to Small-Medium Enterprises (SMEs), with associated profound economic consequences for society. Since the 1970s there has not been any direct oversight of whether or not credit contributes to GDP. We need a macroeconomic policy tool that can discriminate among different categories of credit extended to curb speculation in existing assets (non-GDP) and promote new business investment (GDP).
Government money creation and private credit growth are often presumed the only two ways to enhance nominal demand, yet the Swiss Economic Circle (Wirtschaftsring-Genossenschaft or WIR) is a Swiss Bank whose creation of purchasing power for SMEs has counter-cyclically stabilized the Swiss economy for over 80 years. The Financial Stability Board (FSB) should create localized credit-creation architectures utilizing a Swiss-WIR type currency to funnel credit that reflects systemic and macroeconomic risks that individually will never be rational for banks left to themselves.
... Recently, academics from different schools of thought (Fontana, 2007, Table 1; Werner, 2005Werner, , 2014aWerner, , 2014bRyan-Collins et al., 2016), as well as monetary authorities (ECB, 2011;McLeay et al., 2014;Jakab and Kumhof, 2015), have endorsed the view of an endogenous money creation process. A Bank of England (BoE) quarterly bulletin stated recently: 'In the modern economy, most money takes the form of bank deposits. ...
The paper aims to provide a theoretical advancement in the post-Keynesian debate between Horizontalists and Structuralists by offering an additional theoretical support to the Horizontalist view. Through the newly-introduced notion of paradox of illiquidity, a critique to the endogenous money-liquidity preference model is developed, by focusing on the relationship between the volume of loans and the markup. The paradox of illiquidity aims to deny: (i) the idea of a banking sector achieving illiquid position during its lending activities and, consequently, (ii) the view of an upward-sloping credit supply curve.
... The literature has ignored the banking sector, despite calls to include it in models of the economy and capital flows (e.g., Werner 1994Werner , 1997Werner , 2005Werner , 2012Werner , 2013b. Recently, it has been empirically proven that banks create new money when extending loans, rendering prior savings unnecessary for investment and growth (Werner 2014a(Werner , 2016. Moreover, Werner (2016) points out that in our international financial architecture, foreign-denominated money (which is bank-created and bank-based credit or accounting money) will never enter the receiver economy (but results in domestic bank credit expansion, which can be achieved without foreign investment). ...
... Recently, it has been empirically proven that banks create new money when extending loans, rendering prior savings unnecessary for investment and growth (Werner 2014a(Werner , 2016. Moreover, Werner (2016) points out that in our international financial architecture, foreign-denominated money (which is bank-created and bank-based credit or accounting money) will never enter the receiver economy (but results in domestic bank credit expansion, which can be achieved without foreign investment). This greatly diminishes the theoretical case for FDI to boost growth, especially when domestic credit creation for the real economy is represented in a model of GDP growth, as in our contribution (Werner 1992(Werner , 1994(Werner , 1997(Werner , 2012. ...
... However, after five thousand years of banking, banks have finally been empirically shown not to be financial intermediaries, but rather creators of the money supply (Werner 2014a(Werner , 2016. All loan principals extended by banks are newly created and added to the money supply, accounting for about 97 percent of the money supply (see Werner 2005Werner , 2014c. ...
It is often asserted with confidence that foreign direct investment (FDI) is beneficial for economic growth in the host economy. Empirical evidence has been mixed, and there remain gaps in the literature. The majority of FDI has been directed at developed countries. Single-country studies are needed, due to the heterogeneous relationship between FDI and growth, and because the impact of FDI on growth is said to be largest in open, advanced developed countries with an educated workforce and developed financial markets (although research has focused on developing countries). We fill these gaps with an improved empirical methodology to check whether FDI has enhanced growth in Spain, one of the largest receivers of FDI, whose gross domestic product growth was above average but has escaped scrutiny. During the observation period 1984–2010, FDI rose significantly, and Spain offered ideal conditions for FDI to unfold its hypothesized positive effects on growth. We run a horse race between various potential explanatory variables, including the neglected role of bank credit for the real economy. The results are robust and clear: The favorable Spanish circumstances yield no evidence for FDI to stimulate economic growth. The Spanish EU and euro entry are also found to have had no positive effect on growth. The findings call for a fundamental rethinking of methodology in economics.
... Should it be found empirically that interest rates are not in fact related to economic growth as postulated, this would support the rationing argument, and monetary policy would have to be fundamentally altered. Negative interest rates, demanded by some (Rogoff, 2016), could not be justified. Werner (1996Werner ( , 2005 argued that interest rates follow economic growth and are positively correlated with it. ...
... If not the price of money, then its quantity? Werner (1997Werner ( , 2015, Lyonnet and Werner (2012), Ryan-Collins et al. (2016) and Bermejo Carbonell and Werner (2018) have found that nominal GDP growth and interest rates are driven by a common third factor, the quantity of credit creation 'for the real economy', which beats interest rates and standard monetary aggregates in predicting and explaining nominal GDP growth in various empirical tests, including in Japan, Spain and the UK -just as the Quantity Theory of Credit postulates (Werner, 1992(Werner, , 1997. ...
The rate of interest – the price of money – is said to be a key policy tool. Economics has in general emphasised prices. This theoretical bias results from the axiomatic-deductive methodology centring on equilibrium. Without equilibrium, quantity constraints are more important than prices in determining market outcomes. In disequilibrium, interest rates should be far less useful as policy variable, and economics should be more concerned with quantities (including resource constraints). To investigate, we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth. Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.
