Governments Are Not Households

From the Modern Money and Public Purpose series of seminars held at Columbia University

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3 responses to “Governments Are Not Households

  1. Can somebody tell me how loan create reserves? This can only be true if the banks do not have the necessary required reserves to back the deposits and that they are automatically assigned new reserves with Debt attached to it from the FED(borrowings from the FED) As far as I know and what FED says, aggregate reserve levels can only be changed by the FED and no one else. So basically, if FED allows overdraft, then yes, this process creates new reserves, but only to the extent the banks are short of funds and that they are allowed overdrafts on their accounts with the FED.

  2. The cb is the sole issuer but banks can “force” the cb as the lender of last resort to loan them reserves to clear, or to meet the reserve requirement (if the cb chooses to impose an RR. What this means is that the amount of reserves is determined endogenously in a system in which the cb acts as LLR.

    Of course, when not paying IOR or choosing to set the rate to zero, the cb will also adjust the quantity of reserve balances held by banks through OMO to hit the target rate. But this doesn’t directly affect endogenous money creation through lending other than through price, that is, the interest rate the cb chooses.

    I think it is confusing to many people to say that banks create reserves for the reason you asked.

  3. Pingback: Governments Are Not Households | Reject "F...

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