Analyzing Exogenous Money Creation, Central Bank, and Policy

This essay critically reviews the exogenous approach to money creation, highlighting the central bank's importance and impact on monetary policy. It explores the money creation process under the exogenous theory, emphasizing the central bank's role in controlling the money supply and managing the monetary base through open market operations and reserve ratio requirements. The essay also examines how monetary policy goals are shaped under the exogenous theory, focusing on meeting spending needs and the central bank's ability to govern monetary aspects. The analysis draws upon several academic sources to provide a comprehensive understanding of exogenous money creation and its implications for monetary policy.

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.

The importance of the Central Bank in exogenous theory
The importance of central bank in the exogenous money is very high, as the central banks
offer serious judgments and decisions on this money supply and creation. Exogenous money
has predicted that the central bank has the right to control the quantitative aspects of the same
theory. The bank can control the amount of base money when required. The Central Bank
does the expansion of reserves, on the other side private banks then convert them into loans,
while keeping a percentage of the reserves, for the accommodation of money demand from
customers (Godley and Lavoie, 2016). Further, deposits of loans are made while keeping the
fraction of it and this procedure is continued unless and until nothing is left to lend out. Thus,
the procedure of creation completed by the money multiplier is consistent over time and will
offer central bank the capability to have control over money supply. By this, the central bank
will be able to effectively manage the monetary base, i.e., the requirement of the total of
currency in reserves and circulation by open market operations and the need for reserve ratio.
The quantity of leans is that the opposite of fraction, which banks are required to retain as
reserves, in the situation of exogenous money, the central banks makes the expansion in the
base money supply, and the response of banks to this, i.e., the left amount left to lend out
(Greenwood, Hanson and Stein, 2015). By considering this aspect, the central bank's reports
and documents the gap by making increment in the money stock, and the endogenous the
exogenous money model can make an account for this.
Monetary policy goals under the exogenous theory
Monetary policy goals make it inadequate to meet the demand of commercial banks for
excess reserves indefinitely. The main goal of monetary policy under this theory is to cover
the spending needs. Money supply if or if not endogenous or exogenous is controlled by
various variables and factors also in the monetary authority can have integral governance on
its aspects for attaining its goals (Cúrdia and Woodford, 2016).

References
Godley, W. and Lavoie, M., (2016). Monetary economics: an integrated approach to credit,
money, income, production and wealth. Springer.
Greenwood, R., Hanson, S.G. and Stein, J.C., (2015). A Comparative‐Advantage Approach
to Government Debt Maturity. The Journal of Finance, 70(4), pp.1683-1722.
Lusardi, A. and Mitchell, O.S., (2014). The economic importance of financial literacy:
Theory and evidence. Journal of economic literature, 52(1), pp.5-44.
Calomiris, C., Heider, F. and Hoerova, M., (2015). A theory of bank liquidity requirements.
Cúrdia, V. and Woodford, M., (2016). Credit frictions and optimal monetary policy. Journal
of Monetary Economics, 84, pp.30-65.