Overdrafts and monetary policy

Abstract

The article analyses the overdraft system of bank lending and its potentially harmful effects on monetary policy. From the point of view of the economy as a whole, and for the purposes of monetary policy, three features characterize a banking system that uses the overdraft, as contrasted with the fixed loan, method of lending. First, a different significance attaches to “money supply” as an indicator of liquidity. Secondly, a different significance attaches to bank advances as an indicator of the volume of bank credit and of its effects on the level of spending. Finally, and most importantly, the monetary authorities face an additional difficulty in their efforts to keep the economy on an even keel. The author examines each of these features in turn.

JEL: E51, E52, G21