Dr Azar is Full Professor, Faculty of Business Administration and Economics, Haigazian University. The views expressed in this note are his and do not necessarily reflect the views of BLOMINVEST Bank.
The purpose of this note is to identify the channel of transmission of the money supply process in Lebanon. In other terms, what drives money? And, concurrently, what is driven by money? The answers to these two questions will determine whether monetary policy is feasible and independent, or whether it is constrained and powerless. In technical parlance the issue is whether money is exogenous or endogenous. An exogenous variable implies that it can be controlled. If, in addition, money translates into a significant impact on nominal variables, like the foreign exchange rate or prices, and on real variables, like unemployment or macroeconomic output, then it becomes the preferred instrument to policy-makers. Otherwise, money could have a contemporaneous effect on current nominal income without there being a link between monetary policy-making and aggregate activity.
As the reader might have deduced already, there are two competing theories which have been held by different affiliation of economists. On the one hand, there are the monetarists and the new Keynesians; and, on the other hand, there are the post-Keynesians. The first believe that authorities have control over the money supply through open market operations, which results from a complete control of the monetary base. In turn, the components of the monetary base create money through multiple deposit creation and the money multiplier, which is assumed to be constant or, at least, stable. The equilibrium is obtained by matching money supply creation with money demand as determined by the public. Equilibrium is assured because of spillovers on interest rates which adjust to maintain equality of demand and supply.
For the Full report:
Spotlight – How Viable is Independent Monetary Policy in Lebanon