Central banking (that is, the variety of policy targets, strategies, and instruments used by
monetary authorities all around the world) has become an important topic of discussion
in many circles beyond the economics profession, most notably at the political level and
in society at large. Owing to the global financial crisis induced by the demise of Lehman
Brothers on 15 September 2008, all major central banks in the world have been led to
intervene in order to avert the collapse of the global economy, mainly as a result of the
meltdown of their “globalized” financial systems. Since then, monetary policy has been
in the foreground (to try) to address a number of issues raised by such a systemic crisis
at a global level. Both supporters of and opponents to monetary- policy interventions are
being forced to learn, from empirical evidence more than from conventional economic
wisdom, that several firmly held beliefs in monetary macroeconomics are essentially
wrong or flawed. This is so much so that even the nature of money itself is fundamentally
different from its simplistic understanding – within the central banks’ community as well
as beyond it (see McLeay et al., 2014).
As a matter of fact, the global financial crisis has forced many, particularly within the
mainstream of the profession, to rethink afresh how central banks operate and also the
nature of money and banking. Indeed, the established view about money’s exogeneity –
epitomized by Friedman’s (1969, pp. 4–5) conception of “helicopter money” – as well
as the causal link between bank deposits and bank loans, have been proven wrong by
an increasing volume of empirical evidence across the global economy. To be truthful,
several heterodox economists have been pointing out (since the 1980s, if not earlier) that
in our economic systems money is an endogenous magnitude, whose issuance depends on
banks’ credit lines independently of any pre- existent deposits with them. In this regard,
central banks are settlement institutions on the interbank market, where they set the socalled
policy rate(s) of interest in order to hit their monetary- policy goals eventually. That
being the case, then any central- bank intervention that does not consider this empirical
evidence can only by chance (rather than by design) affect the relevant economic
system as intended by policy makers and the scientific community inspiring them. For
instance, so- called “quantitative easing” programmes put into practice on both sides of
the Atlantic cannot be successful, as they are inspired by the erroneous belief that money
is exogenous and the central bank can induce banks to provide more credit lines to both
households and non- financial firms just by increasing the volume of banks’ “liquidity”
in the central bank vaults.
This Encyclopedia aims at providing a critical understanding of central banking, based
on a plural perspective on several issues at both theoretical and policy- oriented levels. It
intends to explain the complexity of monetary- policy interventions, their conceptual as
well as institutional frameworks, and their own limits and drawbacks. It is informative,
as it provides the reader with the body of knowledge that is necessary to understand the
background of central banks’ decisions in the aftermath of the global financial crisis. It
is stimulating, because it offers different and at times controversial explanations of the
same subject matter, illuminating it also from a historical point of view. The history ofmonetary thinking, indeed, is seminal for understanding both current monetary thought
and contemporary monetary- policy decisions – both when they are right and when they
are wrong, to paraphrase Keynes’s (1936, p. 383) argument with respect to economists’
ideas.
The more than 150 contributors to this collective effort have been confronted with the
challenge of writing nearly 250 entries in a clear and comprehensive way, considering
the space constraint imposed by such a voluminous, but synthetic work. They are all
warmly thanked for having accepted this challenge, whose outcomes should contribute to
a much better, and sound, understanding of an essential item (money) and an important
institution (the central bank) for the “common good”. The editors of this volume wish
also to thank the publishers, whose professional involvement made it possible for this
Encyclopedia to see the light in a timely manner for central banking with regard to the still
open issues raised by the global financial crisis as well as by its dramatic and still largely
unsettled consequences for a variety of stakeholders across the world.
Louis- Philippe Rochon, Laurentian University, Canada
Sergio Rossi, University of Fribourg, Switzerland
References
Friedman, M. (1969), The Optimum Quantity of Money and Other Essays, Chicago: Aldine.
Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan.
McLeay, M., A. Radia and R. Thomas (2014), “Money creation in the modern economy”, Bank of England
Quarterly Bulletin, 54 (1), pp. 14–27.
Author(s): Louis-Philippe Rochon and Sergio Rossi
Edition: cased
Publisher: Edward Elgar
Year: 2015
Language: English
Pages: 540
List of contributors xxii
Introduction xxviii
100% money 1
Jonathan Massonnet
Amsterdamse Wisselbank 4
Dirk Bezemer
Asset- based reserve requirements 6
Aleksandr V. Gevorkyan
Asset management 8
Neil M. Lancastle
Asset price inflation 10
David Colander
Asymmetric information 12
Roy J. Rotheim
Bagehot rule 15
Thorvald Grung Moe
Bagehot, Walter 16
Andrea Pacella and Riccardo Realfonzo
Bancor 18
Pietro Alessandrini
Bank Act of 1844 21
Xavier Bradley
Bank capital and the new credit multiplier 23
Yannis Panagopoulos and Aristotelis Spiliotis
Bank deposit insurance 25
Claudia Maya
Bank deposits 26
Oliver Simon Baer
vi The Encyclopedia of Central Banking
Banking and Currency Schools 28
Stefano Figuera
Banking supervision 29
Ruxandra Pavelchievici
Bank money 32
Oliver Simon Baer
Bank of Canada 34
Mario Seccareccia
Bank of England 36
Philip Arestis
Bank of Italy 38
Alessandro Caiani
Bank of Japan 40
Takashi Yagi
Bank run 42
Virginie Monvoisin
Banque de France 44
Claude Gnos
Barings Bank 46
Robert H. Koehn
Basel Agreements 48
Fernando J. Cardim de Carvalho
Bernanke, Ben Shalom 50
Jamie Morgan and Brendan Sheehan
Biddle, Nicholas 52
Nathaniel Cline
BIS macro- prudential approach 54
Ivo Maes
Bretton Woods regime 56
Omar F. Hamouda
Bubble 58
Alicia Girón
Bubble Act 60
William E. McColloch
Bullionist debates 61
Lefteris Tsoulfidis
Burns, Arthur Frank 64
James Forder
Capital controls 66
Kevin P. Gallagher
Capital flight 68
Emiliano Libman
Capital requirements 69
Fabio S. Panzera
Carney, Mark 71
Jim Stanford
Carry trade 74
Daniela Gabor
Cash 76
Oliver Simon Baer
Central bank as fiscal agent of the Treasury 78
Eric Tymoigne
Central bank bills 80
Aleksandr V. Gevorkyan
Central bank credibility 82
Emmanuel Carré
Central bank independence 85
Arne Heise
Central bank money 87
Andrea Terzi
Bubble 58
Alicia Girón
Bubble Act 60
William E. McColloch
Bullionist debates 61
Lefteris Tsoulfidis
Burns, Arthur Frank 64
James Forder
Capital controls 66
Kevin P. Gallagher
Capital flight 68
Emiliano Libman
Capital requirements 69
Fabio S. Panzera
Carney, Mark 71
Jim Stanford
Carry trade 74
Daniela Gabor
Cash 76
Oliver Simon Baer
Central bank as fiscal agent of the Treasury 78
Eric Tymoigne
Central bank bills 80
Aleksandr V. Gevorkyan
Central bank credibility 82
Emmanuel Carré
Central bank independence 85
Arne Heise
Central bank money 87
Andrea Terzi
Credit divisor 119
Greg Hanngsen
Credit easing 121
Richard A. Werner
Credit guidance 123
Richard A. Werner
Credit rationing 125
Arne Heise
Cross- border retail banking 128
Harald Sander
Currency board 130
Jean- François Ponsot
Currency crisis 132
Brenda Spotton Visano
Debasement 135
Lefteris Tsoulfidis
Debt crisis 136
Brenda Spotton Visano
Debt deflation 138
Steve Keen
Deleveraging 140
Domenica Tropeano
Deutsche Bundesbank 141
Jörg Bibow
Development banks 144
Wesley C. Marshall
Dollar hegemony 145
David M. Fields
Dollarization 148
Mehdi Ben Guirat and Louis- Philippe Rochon
Draghi, Mario 150
Stefano Lucarelli
Effective lower bound 153
Fabio S. Panzera
Efficient markets theory 154
Robert W. Dimand
Endogenous money 157
Giancarlo Bertocco
Euro- area crisis 159
Sergio Rossi
European Central Bank 160
Jörg Bibow
European monetary union 163
Claude Gnos
Exchange- rate interventions 165
Alexander Mihailov
Exchange- rate pass- through 167
Carlos Schönerwald
Exchange- rate targeting 170
Luigi Ventimiglia
Fear of floating 172
Juan Barredo Zuriarrain
Federal Open Market Committee 174
Daniel H. Neilson
Federal Reserve System 176
Ruxandra Pavelchievici
Fiat money 178
Edward J. Nell
Finance and economic growth 180
Eckhard Hein
Financial bubble 183
Fabio S. Panzera
Financial crisis 185
Robert Guttmann
Financial deregulation 187
Eugenia Correa
Financial innovation 189
Daniela Tavasci
Financial instability 191
Fabio S. Panzera
Financial instability hypothesis 193
Jan Toporowski
Financial integration 195
Marco Veronese Passarella
Financialization 197
Özgür Orhangazi
Financial literacy 199
Robert H. Scott
Financial repression 201
Juan Matías De Lucchi
Financial supervision 203
Fabio S. Panzera
Financial transactions tax 205
Noemi Levy- Orlik
First and Second Banks of the United States 207
Jane Knodell
Fisher effect 209
Angel Asensio
Flow of funds 211
Eugenio Caverzasi and Antoine Godin
Forward guidance 213
Vera Dianova
Fractional reserve banking 215
Giancarlo Bertocco
Free banking 217
Stefano Figuera
Friedman rule 219
Alexander Mihailov
Gibson’s paradox 223
Alejandro Fiorito
Glass–Steagall Act 224
Aldo Barba
Goodhart’s law 227
Charles Albert Eric Goodhart
Greenbacks 228
Robert W. Parenteau
Greenspan, Alan 230
Jamie Morgan and Brendan Sheehan
Gresham’s law 232
Mario Seccareccia
Hayek, Friedrich Augustus von 235
Maria Alejandra Caporale Madi
High- powered money 236
Maria Alejandra Caporale Madi
Housing bubble 239
Theodore Koutsobinas
Hume, David 241
Nathan Tankus
Hyperinflation 243
Esteban Pérez Caldentey
Impossible trinity 245
Ricardo Summa
Inconvertibility 247
Nikolay Nenovsky
Inflation 248
Alvaro Cencini
Inflation measurement 251
Sergio Rossi
Inflation targeting 254
Sergio Rossi
Ingot Plan 255
Germán D. Feldman
Inside and outside money 257
James Andrew Felkerson
Interdependence of money demand and supply 259
Duccio Cavalieri
Interest rate pass- through 261
Natalia Andries
Interest rate rules – post- Keynesian 263
Mark Setterfield
Interest rates setting 265
Angel Asensio
Interest rates term structure 267
James Andrew Felkerson
International gold standard 269
Ramaa Vasudevan
International Monetary Fund 271
Eugenio Caverzasi
International reserves 273
Jean- François Ponsot
International settlement institution 275
Sergio Rossi
Investment banking 277
Jamie Morgan and Brendan Sheehan
Kemmerer, Edwin Walter 280
Rebeca Gomez Betancourt
Keynes as monetary adviser 282
Anna Carabelli
Keynes as monetary theorist 284
Luca Fantacci and Maria Cristina Marcuzzo
Keynes Plan 286
Mario Cedrini
King, Mervyn 288
Olivier Giovannoni
Lamfalussy, Alexandre 291
Ivo Maes
Law, John 292
Nikolay Nenovsky
Lender of last resort 294
Domenica Tropeano
Liability management 296
Maria Alejandra Caporale Madi
LIBOR 298
Alexis Stenfors
Liquidity trap 300
Sheila C. Dow
Long- term refinancing operations 302
Benjamin Schmidt and Peter Spahn
Macro- prudential policies 305
Fabio S. Panzera
Macro- prudential tools 307
Helene Schuberth
Marx, Karl 309
William E. McColloch
Merchant banks 311
Marcelo Milan
Metallism 313
Devin T. Rafferty
Minsky, Hyman Philip 315
Marco Veronese Passarella
Minsky moment 318
Helene Schuberth
Modern Money Theory 320
Eugenio Caverzasi and Antoine Godin
Modigliani–Miller theorem 322
Tracy Mott
Monetarism 324
Alvaro Cencini
Monetary aggregates 326
Jonathan Massonnet
Monetary approach to the balance of payments 329
Alexander Mihailov
Monetary circuit 331
Louis- Philippe Rochon
Monetary History of the United States, 1867–1960 333
Ruxandra Pavelchievici
Monetary policy and income distribution 335
Pierre Monnin
Monetary policy in a small open economy 337
Etelberto Ortiz
Monetary policy indicators 339
Theodore Koutsobinas
Monetary policy instruments 341
Maria Alejandra Caporale Madi
Monetary policy objectives 343
Nathan Perry
Monetary policy transmission channels – neoclassical 345
Emmanuel Carré
Monetary policy transmission channels – post- Keynesian 347
Eladio Febrero and Jorge Uxó
Monetary targeting 350
Helene Schuberth
Monetary theory of distribution 352
Massimo Pivetti
Money and credit 354
Antoine Godin
Money creation 356
Bernard Vallageas
Money creation and economic growth 357
Mathias Binswanger
Money doctors 360
Eric Helleiner
Money illusion 361
Giuseppe Mastromatteo and Adelmo Tedeschi
Money multiplier 363
John Smithin
Money neutrality 366
Angel Asensio
Money supply 368
Jo Michell and Engelbert Stockhammer
Narrow banking 371
William Miles
National Banking Acts 373
Nathaniel Cline
Natural rate of interest 374
Jonathan Massonnet
Negative rate of interest 376
Fabio S. Panzera
Norges Bank 378
Thorvald Grung Moe
Norman, Montagu 380
Robert W. Parenteau
Open- market operations 383
Nathan Perry
Open- mouth operations 385
Vijayaraghavan Ramanan
Operation Twist 386
Tracy Mott
Optimal international currency reserves 388
Mehdi Ben Guirat
Optimum currency area 391
Annina Kaltenbrunner and Engelbert Stockhammer
Original sin 392
Jean- François Ponsot
Output gap 394
Gilberto Libanio and Marco Flávio Resende
Outright Monetary Transactions 396
Vincent Grossmann- Wirth
Padoa- Schioppa, Tommaso 399
Fabio Masini
Patinkin, Don 401
Esteban Pérez Caldentey
People’s Bank of China 403
Gilberto Libanio
Phillips curve 405
Malcolm Sawyer
Policy rates of interest 407
Vera Dianova
Prebisch, Raúl 409
Esteban Pérez Caldentey
Price- level targeting 411
Emmanuel Carré
Quantitative easing 414
Brian K. MacLean
Quantity theory of credit 416
Richard A. Werner
Quantity theory of money 419
Giuseppe Mastromatteo and Adelmo Tedeschi
Quantum macroeconomics 422
Alvaro Cencini
Quesnay, Pierre 424
Muriel Dal- Pont Legrand and Dominique Torre
Random walk 427
Neil M. Lancastle
Real- balance effect 428
Jonathan Massonnet
Real- bills doctrine 430
Philip Pilkington
Reflux mechanism 432
Vijayaraghavan Ramanan and Louis- Philippe Rochon
Reichsbank 434
Richard A. Werner
Repurchase agreement 437
Philip Pilkington
Reserve Bank of India 439
Suranjana Nabar- Bhaduri
Reserve currency 441
Salewa ‘Yinka Olawoye
Reserve requirements 443
James Andrew Felkerson
Ricardo, David 446
John E. King
Rist, Charles 448
Dominique Torre
Rules versus discretion 450
Dany Lang
Schacht, Hjalmar Horace Greeley 453
Edoardo Beretta
Settlement balances 455
Vidhura S. Tennekoon
Settlement system 456
Vidhura S. Tennekoon
Shadow banking 458
Wesley C. Marshall
Sovereign lending 460
Aldo Barba
State money 462
Jonathan Massonnet
Sterilization 465
Daniela Gabor
Strong, Benjamin 466
Slim Thabet
Sudden stops 468
Daniela Tavasci and Luigi Ventimiglia
Sveriges Riksbank 470
Elias Bengtsson
Swap 471
Benoît Nguyen
Swiss National Bank 474
Sergio Rossi
Systemically important financial institutions 475
Oliver Simon Baer
TARGET2 system 478
Sergio Rossi
Taylor rule 480
Peter Kriesler
Thornton, Henry 482
Aldo Barba
Time inconsistency 484
Angel Asensio
Tobin tax 486
Slim Thabet
Triffin dilemma 488
Jörg Bibow
Triffin, Robert 491
Esteban Pérez Caldentey
Twin crises 493
William Miles
Usury laws 495
Mohamed Aslam and Marie- Aimee Tourres
Volcker experiment 497
Giuseppe Mastromatteo and Giovanni Battista Pittaluga
Vulture fund 498
David Pringle
White, Harry Dexter 501
Juan Barredo Zuriarrain
Wicksell, Knut 503
Jonathan Massonnet
Yield curve 505
Edward J. Nell
Zero interest- rate policy 508
Philip Pilkington
