2 - Money and credit in the short run
Published online by Cambridge University Press: 05 January 2013
Summary
The previous chapter examined an economy in which consumers were constrained to hold nonnegative money balances. The only ways for the Government to alter the money stock were either to engage in fiscal policy by making positive or negative money transfers to the private sector - that type of policy was briefly considered at the end of the chapter - or to trade on the consumption goods markets. That sort of money is often called outside money in the literature.
We will now introduce to the model the possibility for consumers to borrow against future income by selling short-term bonds to a governmental agency, called the “Bank.” Since there is money creation whenever the Bank grants loans by buying bonds from the consumers, the money stock can then vary over time according to the needs of the economy, through the extension of credit.
A useful distinction between “inside” and “outside” money is often developed in credit money economies of this type. The part of the money stock that is “backed” by the Bank's claims on the private sector - that is, that has been issued by the Bank when purchasing consumers' bonds - is called inside money. Outside money is not backed by private debts.
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- Information
- Money and ValueA Reconsideration of Classical and Neoclassical Monetary Economics, pp. 48 - 95Publisher: Cambridge University PressPrint publication year: 1983