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Keywords:

  • Free Banking;
  • Competitive Banks;
  • Deregulation;
  • Clearinghouse;
  • Adverse Balances;
  • Monetary Policy;
  • Endogenous Money

Since the full institution of deregulation the mechanics of how monetary policy operates has fundamentally changed. No longer can a change in stance be shown as shifts in the exogenously-determined money supply function in the Keynesian interest framework, because in competitive banking systems the money supply process is fully endogenous. Money endogeneity correctly suggests a reinterpretation of the vertical money supply function. A vertical money supply function drawn against bond yields does not automatically mean exogeneity. Monetary policy is best shown as shifts in the money demand function.