Exogenous Approach to Money Creation and its Importance in Central Bank

GROUP ASSIGNMENT

Exogenous approach to money creation
Exogenous money creation is based on money multiplier however it is not a process of
money creation. Instead, it is a structure of monetary policy, in which money creation is done
endogenously through bank loans and foreign asset accretion made by banks which at the
same time creates new bank deposits.
In an economy, when the supply of money is exogenous, it is considered to be identified by
the preferences of banks for additional reserves and the preferences of deposits for retaining
cash. Further, this preference does not get impacted by variables of the economy such as rate
of interest (Lusardi and Mitchell, 2014). As a result, constancy is seen in money multiplier
and the amount of supplied money, and there is no variance in the rate of interest. Hence, it
can increase the supply curve of Exogenous vertical money as shown in the below figure:
Figure 1: Supply curve of exogenous vertical money
(Source: Lusardi and Mitchell, 2014)
Increase and the movement of the money supply from the leftwards, as such while the
increase declines in the money multiplier and hence the money supply is generate. Decreases
in the money variables can have the converse effect. Further, the effect of MB will be direct,
moving the money supply curve to leftwards and rightwards with rising and fall, respectively.
This approach is not completely realistic; it is a mixture of both Exogenous and Endogenous
as it will be more suitable in reality (Calomirism, Heider and Hoerova, 2015). This is
probably a more supportive model and can result more effective during its application in
reality.