Bank markup behaviour and the elasticity of the supply of funds in Canada: An empirical analysis.

Abstract

This dissertation studies the nature of the elasticity of the supply of funds through the analysis of concepts as presented by post Keynesian horizontalists and post Keynesian non-horizontalists. These two competing views are outlined, and pertinent issues are isolated. Empirical analysis is performed using data for the Canadian economy in order to assess the validity of both positions. In order to distinguish empirically between horizontalists and non-horizontalists, the variability of the commercial bank markup is tested, as well as any evidence of the presence of financial fragility. A markup that varies with changes in gross domestic product would indicate that the determination of the interest rate was not purely a supply-side phenomenon, and would violate the horizontalist position. Any evidence of the presence of financial fragility resulting from increased firm indebtedness would also indicate that constraints on monetary creation exist, as consistent with non-horizontalist views. The econometric tests attempted in this dissertation address both these issues using Canadian data for the 1980 to 1995 period. The results of the empirical tests conducted do not provide any evidence to support an upward sloping money supply function. (Abstract shortened by UMI.)