Monetary intermediation theory: on the role of banks and debt in the monetary system
Date
2020
Authors
Spearman, N C
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Abstract
Why are banks central to the monetary system? And how does their role in this system affect the real economy? In the wake of the 2007/8 financial crisis, these fundamental questions have re-surfaced as both controversial and crucial to the study of macroeconomics. Interest in this questioning has been buoyed by the wave of excitement that accompanied the “crypto-currency” bubble of 2017; and by the promises of emerging “fintech” innovations premised on the idea of revolutionising money and banking. In this thesis, I present a novel framework for thinking about the role of banks in the economy and make three contributions to the literature. First, I develop a monetary theory of banks, and show how this is useful for explaining why bank liabilities are central to the monetary system; for explaining bank balance sheet structure, products, and contracts; and for providing new and compelling answers to other enduring puzzles within bank theory. Second, I test empirical evidence from South African bank balance sheet data and find support for the monetary intermediation theory of banks. I discuss the policy implications of these findings, as well as the broader implications of framing banks as monetary intermediaries more generally. Third, I extend the dynamic stochastic general equilibrium framework to incorporate the essential features of monetary intermediation and analyse the affects. The model indicates that monetary intermediation matters for real economic activity. Credit shocks are found to generate real instability, and endogenous inflation targeting monetary policy is shown to be an effective tool for mitigating the real effects of these shocks. The results contribute to contemporary debate concerning the role of both banks and monetary policy in the economy
Description
A thesis submitted in fulfilment of the requirements for the degree of PhD, University of the Witwatersrand, Johannesburg Faculty of Commerce, Law and Management Wits Business School, 2020