bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

In fact, even though each approach offers a different range of insights and
highlights different features of the monetary system as being significant, it
is possible to reconcile the two approaches. Indeed it is perfectly possible
to analyse money supply changes or flows by using an identity which features
the monetary base while one could, if one were so inclined, analyse
the existing stock of money in terms of the amount of lending. Each
approach is, strictly speaking, agnostic as regards the underlying behavioural
characteristics of the monetary system, but each furnishes insights
which are more relevant to a certain type of regime and has thus become
associated with it. We shall see more of this in a moment, but let us firstly
see that the two approaches are formally equivalent.
Pause for thought 3.5:
The B-M approach consists of a statement about the monetary base and
two behavioural relations (see 3.6). We can write the FoF approach in
exactly the same terms if we remember that the monetary base consists of
cash held by the non-bank public (Cp) together with bank lending to the
public sector in the form of reserve assets (Db + Cb). (See endnote 2 for
this treatment of bank reserves). Bank lending to the public sector in the
form of reserve assets must be equal to total bank lending to the public sector
minus bank holdings of non-reserve assets (e.g. bank holdings of government
bonds, Gb). So (in changes):
∆B ≡∆Cp + (∆Lg −∆Gb)
and, substituting 3.16 and rearranging:
∆B ≡∆Cp −∆Gb + (PSBR −∆Gp ± ∆ext − ∆Cp )
From 3.18 and 3.20 we can obtain:
∆M ≡∆B + ∆Gb + ∆BLp
THE MONEY SUPPLY PROCESS 67
Using the FoF approach, explain the likely effect on the rate of monetary expansion
of a central bank’s decision to raise interest rates. (Compare your answer with your
reaction to PfT 3.2).
...3.19
...3.20
...3.21
What 3.21 shows is that we can make control of changes in the money
stock appear to depend upon control of the base together with two behavioural
relationships, in this case the banks’ demand for government debt
(∆Gb) and lending to the non-bank private sector (∆Lp), almost as easily as