Credit substitution and the euro-currency market

Abstract

The inflationary implications of the Euro-currency market continue to be a source of contention and misunderstanding. One view on the matter is that the market, having some potential for net credit creation, adds dangerously to the rate of world credit expansion. As a challenge to this view, there are others who caution that the case for joint action is not yet well-founded. The author sides with the latter argument, arguing that considerable evidence can be found to show that the growth of the Euro-currency market represents to a significant extent a substitution for, rather than an addition to, credit expansion in other forms. Euro-currency credits appear to be substitutes for four alternative types of accommodation: domestic credit to non-banks, domestic “monetary base” creation, foreign money markets and forward exchange markets. 

JEL: E31, E44, E51