Bank money

Bank money is a liability issued by banks and is sometimes also referred to as credit-money. According to Keynes (1930 [1971], p. 5) bank money "is simply an acknowledgment of private debt, expressed in the money of account, which is used by passing from one hand to another, alternatively with money proper, to settle a transaction".

Chartalists such as Wray (1998) distinguish between state money and bank money. In this view, state money is exogenously created by the state in the form of central bank and treasury liabilities. Bank money is a multiple of state money, recorded on the liabilities side of commercial banks' balance sheets. Chartalists assume that the treasury and the central bank can be considered as one entity from an economic point of view (Wray, 2003, p. 87). Gnos and Rochon (2002, p. 48) disagree, pointing out that "if the Fed is the treasury's bank, then the Fed becomes a central bank vis-à-vis the treasury as well as vis-à-vis private banks, the latter role consisting in converting monies into one another and thus allowing banks to meet their reciprocal liabilities". Additionally, chartalists believe "the [US] government can buy anything that is for sale for dollars merely by issuing dollars" (Wray, 1998, p. ix). But neither central banks nor treasury departments can finally purchase anything by incurring a debt. Instead, every final pur- chase of the treasury or the central bank must be financed with income sooner or later. It is therefore more realistic to suggest that all modern money is (central or commercial) bank money.

Endogenous money

Endogenous money constitutes the cornerstone of post-Keynesian monetary theory, which underlines that the supply of money is determined by the demand for means of payment. An effective presentation of this theory has been proposed by Moore (1988), who differentiates between horizontalists and verticalists. The mainstream theory reflects the verticalist view and states that the money supply function is exogenous, independ- ent from money demand and controlled by the central bank. By contrast, according to endogenous money theory, which reflects the horizontalist view, the supply of money is demand determined, and the central bank can only control the rate of interest, not the quantity of money.

Development banks

Arriving at a concrete definition of development banks is surprisingly tricky, as they have existed in many parts of the world in different forms for centuries. Yet development banks can be broadly defined by their ownership, how they source their funding, and how funding is distributed. Development banks in almost all cases are owned by the State. Unlike private banks, which are created in order to generate profit, development banks are created as macroeconomic policy institutions. This dynamic is not limited to develop- ing countries, or even to central governments. The socialization of finance through devel- opment banks has occurred in many forms under governments of different size, location, historical period, and political leaning.

While the criterion of ownership is a necessary element in defining development banks, it can also create confusion. Many State-owned financial entities that were not created to be development banks have in diverse times and places assumed roles typically assigned to development banks: central banks and State-owned commercial banks have in many instances channelled government funds to specific economic activities gener- ally considered to be part of economic development. Yet the ownership criteria can also make things clear. Institutions that are officially dedicated to economic development, such as the Asian Development Bank, the Inter-African Development Bank, and the Inter-American Development Bank, are not owned by the States in whose territory they operate. These banks were originally created in the post-war period to support foreign currency financing for developing countries, yet their institutional operations have since changed considerably.

Free banking

The term "free banking" is generally used to describe a structure of the credit market based on the principle of laissez-faire and characterized by the absence of entry and exit barriers, freedom of monetary issue and the possibility of unrestricted lending and borrowing.

The best-known examples of free banking are those observed in Scotland (from the end of the monopoly of the Scottish Bank to the Peel Act) and in the United States (between 1837 and 1863).

One of the principal supporters of a free banking regime was Mises, whose theories were adopted (and further developed) by the Austrian School. He declared his approval for free banking while recognizing its limitations. In his view, acceptance of a liberalized banking activity did not imply abolition of every form of control over monetary issue: his awareness that banks could issue money without any limit led him to turn his attention to an integral gold monetary system (see Mises, 1949).

Asymmetric information

Asymmetric information reflects a view among New Keynesian economists that allows for incomplete markets on account of the fact that principal and agent do not possess the same degree of information about a particular event or state. This perceived infor- mational asymmetry weighs heavily on the New Keynesian credit-channel theory of the monetary policy transmission mechanism, based on the loanable funds view of the rate of interest, whereby the real rate of interest acts as a price-rationing device to equilibrate the supply and demand for loanable funds. New Keynesians acknowledge that the real rate of interest may not perform this equilibrating function when the demand for loanable funds rises beyond certain levels. Lenders may withhold credit to otherwise creditworthy borrowers rather than offering loans at higher rates of interest even if these borrowers would be willing to pay those higher rates. Money neutrality is violated as the predicted link between changes in high-powered money and the money stock is upset. Output and employment are then less than their full-employment counterparts.

Clearing system

A clearing system consists of a series of norms and coordinated processes by which financial institutions systematically collect and mutually exchange data or documents on funds or securities transfers to other financial intermediaries at an agreed place called "clearing house". These procedures can also involve the determination of partici- pants' bilateral and/or multilateral net positions and aim at simplifying the discharge of respective obligations on a net or net net basis in a settlement system. Occasionally, the expression "clearing system" implies a mechanism of multilateral netting by novation and the settlement of the corresponding payments or, imprecisely, the process itself of settling transactions. Since their functioning involves "a moderate stock of solid Money [. . .] [while] a large proportion of both solid and paper Money might be spared" (Seyd, 1871, p. 5) and they naturally aim at "eliminating or reducing cash transfers" (Einzig, 1935, p. 66), clearing systems gained particular success in the nineteenth century.

Corridor and floor systems

A corridor-type (with its floor-type variant) system is an approach to the setting of inter- est rates that an increasing number of central banks have adopted since the mid 1990s. The system has now become the operational framework that most central banks utilize for implementing their strategies on interest rates.

The interest rate policy of central banks consists of a strategy and an operational framework. Strategically, central banks set their desired level for one or more interest rates, based on what they consider adequate in terms of their public policy objectives. Operationally, they use a set of instruments and procedures to effectively steer the chosen interest rates toward the target policy rate. Since the 1990s, the prevailing operational framework for monetary policy implementation is a corridor system. In the 2000s, the central banks of Japan and New Zealand, as well as a number of other central banks in the aftermath of the global financial crisis, have further modified their framework and embraced a floor system.