Credit, Money and Macroeconomic Policy
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Credit, Money and Macroeconomic Policy

A Post-Keynesian Approach

Edited by Claude Gnos and Louis-Philippe Rochon

With recent turmoil in financial markets around the world, this unique and up-to-date book addresses a number of challenging issues regarding monetary policy, financial markets and macroeconomic policy.
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Chapter 9: The Basel II Influence on the Money Supply Process: A Comparative Analysis of the Eurozone and the United States

Stelios Karagiannis, Yannis Panagopoulos and Aristotelis Spiliotis


Stelios Karagiannis, Yannis Panagopoulos and Aristotelis Spiliotis* INTRODUCTION The aim of this chapter is to compare the implications of the Basel II credit risk regulatory framework for the money supply process in the US and the eurozone banking systems. Moreover, our aim is not restricted to simply testing the effectiveness of the Basel II directives in these two major systems across both sides of the Atlantic. With the assistance of the equity or new credit multiplier and a new loan model, we further examine and reveal the monetary school of thought that the two banking systems follow (for example, new consensus, horizontalism or structuralism). More analytically, in the next section, we discuss the theoretical importance of bank equity raised by the Basel II (BCBS, 2006) directives for credit expansion and consequently for the money supply process. The importance for bank equity is expressed through a ‘new credit multiplier’ model. This multiplier is further extended to a new multivariate loan model. This model is presented in the third section and includes explanatory variables which theoretically cover both orthodox1 (related to the Basel II proposals), and alternative post-Keynesian (PK) monetary views.2 The statistical importance of the explanatory variables defines the nature of the money supply process in the examined banking systems and consequently the expected effectiveness of the Basel II rules. In the fourth section, the data, the econometric methodology and the empirical results are presented. According to our findings, the eurozone banking system seems to favour a structuralist explanation of the...

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