Endogenous money

The theoretical basis of this position is that money comes into existence through the requirements of the real economy and that the banking system reserves expand or contract as needed to accommodate loan demand at prevailing interest rates.

Central banks implement policy primarily through controlling short-term interest rates.

The supply curve shifts to the right when financial intermediaries issue new substitutes for money, reacting to profit opportunities during the cycle.

Theories of endogenous money date to the 19th century, with the work of Knut Wicksell,[1] and later Joseph Schumpeter.

Significantly, the theory states that if the non-bank sector's deposits are augmented by a policy-driven exogenous shock (such as quantitative easing), the sector can be expected to find ways to 'shed' most or all of the excess deposit balances by making payments to banks (comprising repayments of bank loans, or purchases of securities).