Debate on reserve constraints and its implications for economic theory
Debate on reserve constraints and its implications for economic theory

Summary/Abstract: The present paper deals with the main presuppositions and implications of endogenous money theory. The aim of this research is to prove that reserve money does not represent an effective constraint on bank lending and, therefore, to show that the theory of endogenous money represents a good approximation of the monetary system. We use a framework of basic financial accounting to trace and explain some of the most fundamental monetary operations in the monetary economy. We use this framework to enter into the debate about whether reserves are an effective constraint on bank lending. We argue that reserves are only a soft ex-post constraint on bank lending and not a hard ex-ante constraint. In the last section of the paper we derive some basic implications of endogenous money theory for economic theory in general. The paper is concluded with a proof that money neutrality thesis is not true. That means that monetary phenomena have a direct causal impact on real phenomena.

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