Horizontalism is an approach to money creation theory pioneered by Basil Moore which states Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press. ISBN ; Palley, Thomas ( ). PDF | In Basil Moore published his book Horizontalists and Verticalists: The Macroeconomics of Credit Money, which this year celebrates. The latest issue of the Review of Keynesian Economics includes a special mini- symposium honouring the 25th anniversary of Basil Moore’s.
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Robert Lucas had issued his critique on econometric policy evaluation 12 years earlier and thereby triggered the avalanche of micro-based macroeconomics that still prevails today. These worries were largely confirmed by the developments that led to the financial crisis of — and the need for central banks to norizontalists intervene to substitute for the drying-out of short-term capital market funding sources.
The Macroeconomics of Credit Moneywhich this year celebrates its 25th birthday. This inverts the mainstream textbook money multiplier relationship between deposits and loans since loans are said to cause deposits which in turn cause reserves. He did not shy away from explicitly spelling this out: Moore’s ideas may have shaped the course of post-Keynesian economics. More than 2 decades before Friedman and Kuttner explained to the inclined reader of the Handbook of Monetary Economics how verticalsts banks do it — that is, steering the rates — Moore nailed it veerticalists in chapter 5 of his book.
In contrast, we believe that the idea of a natural rate of interest does not put into question the possibility that the central bank controls the actual money rate.
The foundations for modern New Keynesian monetary models had been laid by Calvo or Blanchard and Kyotaki Virtually everything written in the monetary, macro- and growth literature — [is] either mis-specified or incomplete.
In our view, Moore interpreted Wicksell too narrowly, by inferring from Wicksell’s natural rate hypothesis that: It states that an increasing demand for loans by bank customers leads to banks making more loans and creating more deposits, without regard to the size of the bank’s available reserves.
While we fully accord with Moore’s main themes, there are three of his arguments that we would not fully subscribe to: For if the monetary base is endogenous and not under the control of the central bank, then the whole process of credit creation must be endogenous as well.
Horizontalism – Wikipedia
What may explain why Moore could formulate his critique of the US Federal Reserve and academic monetary doctrine so early was his strong interest in banking and finance matters. Even though the economies operated largely under commodity standards, they also relied on a significant credit expansion by commercial banks, and the backing by metal was seldom complete. He spent his first sabbatical with John Gurley and Edward Shaw in Stanford who, inhad written their influential monograph, Money in a Theory of Finance.
With respect to monetary issues, they firmly rested on the possibility that central banks can exert direct control over the monetary base. The Wicksellian theory of the natural rate of interest has regained popularity and we believe that this theory is fundamentally correct, even if there is a danger of misinterpreting it.
Finally, inthe Fed implemented a reform to its discount window, setting the discount rate systematically basis points above the federal funds target rate and thus, after more than 80 years, it put an end to setting the discount rate below market rates. More Contact us Publish with us Subscribe. This book has stood the test of time and is still a must-read for anyone interested in understanding the functioning of the monetary system and the relationship between the banking and financial sector and the central bank.
The developments since then have corroborated his theory and his views in a remarkable way. Search Google Scholar Export Citation. Yet, in light of the strong vindication of Moore’s book and the recent progress of mainstream economics to formulate monetary policy in terms of interest rates, we believe that the textbook view of controllable money supply will also be buried some day and thus the mainstream academic profession must, hopefully, eventually recognize the merits and power of the horizontalist view.
Chapters 2 and 3 are devoted to banking and financial intermediation, and Moore thereby provides the ground for the right understanding of the logic of monetary policy actions. Because, if anything, the last 25 years have vindicated the substance of his thinking in a surprising way that could hardly have been anticipated in Sign in to annotate.
One of the reasons why Moore may have devoted relatively little attention to the nineteenth century is his correct remark that commodity money is not the same as credit money, and that David Hume’s quantity theory was indeed appropriate as a theory for a commodity standard.
The heritage left by his book, the intellectual deepness of his thoughts, and the clarity with which his ideas were put forward have, in our view, made Horizontalists and Verticalists a key contribution to monetary economics.
Thus credit money created by private banks can be seen to be leveraging of those reserves without the guidance of a particular leverage ratioi. We discuss this book from today’s perspective, and in particular whether Moore’s main assertions have been validated or rejected by the development of central bank practices and academic monetary economics.
EconPapers: Basil J. Moore’s Horizontalists and Verticalists: an appraisal 25 years later
This curious disjunction between theory and practice predates the enthusiasm of the s for monetary targets. Such fundamental theoretical misspecification renders all verticalidts empirical parameter estimates highly suspect. In a similar vein, the instrument-choice problem stressed in the influential model by Poole discussed the pros and cons of using the interest rate or the money supply to stabilize macroeconomic fluctuations.
Festschrift in Honor of Basil J.
Basil J. Moore’s Horizontalists and Verticalists: an appraisal 25 years later
And, surprisingly, it’s all contained in Basil Moore’s book. The last major monograph on monetary theory, Woodford is already fully aligned with Moore’s observations from 15 years earlier.
Monetary policy decision making almost everywhere means a decision about the operating target for an overnight interest rate, and the increased transparency about policy in recent years has almost meant greater explicitness about the central bank’s interest-rate target and about the way in which its interest-rate decisions are made….