The paper examines the endogenous-money-supply theory for a representative emerging-market economy, namely Poland. The Post-Keynesian theory is tested against the fractional reserve theory of money creation that assumes money supply to be exogenously determined and controlled by the monetary authority. Granger-causality tests, the estimates from a vector error-correction model and the analysis of impulse-response functions from a general vector autoregression support the Post-Keynesian proposition of money-supply endogeneity in Poland during the 2001–2016 period. The demand for bank credit, represented by bank lending, causes changes in both bank deposits and the M3 money supply. Bank loans also Granger-cause the monetary base, as Post-Keynesian theory asserts. In short, loans make deposits, instead of the reverse. The M3 money multiplier does not Granger-cause broad money supply in Poland – a finding which further undermines the popular ‘money multiplier’ view. The above conclusions provide important insights for the Polish central bank regarding how it should understand monetary policy.
Contributor Notes
Email: gbachurewicz@wz.uw.edu.pl. The author would like to thank the two anonymous reviewers for their comments on an earlier draft of the paper that greatly helped improve the final version. The author would also like to express his gratitude to Andrzej Rutkowski and Jakub Górka from the University of Warsaw Faculty of Management for their support and constructive comments on an earlier version of this paper; and Witold Grostal from the National Bank of Poland for suggesting the initial idea of the paper.
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