Monetary Circulation and Overdraft Economy

Abstract

If the international economic literature deals extensively with problems of indebtedness, on the level of businesses as well that of governments, the concept of the overdraft economy is rarely invoked as an analytical tool outside French research. There is one study dealing with the Finnish economy1 that is often cited early on by authors concerned with the particular form of operation of the economies concerned. The concept has been developed to permit the theoretical specification of the operation of the French economy up to 1980, and it has served as a basis for the financial equations of models such as Metric2 and, more generally, for the studies of the research divisions at the Banque de France and the National Institute for Statistics (INSEE), which is responsible for national accounting. The distinction first posited by Vivien Levy-Garboua3 and Gerard Maarek4 between the overdraft economy and the traditional system, now designated as a financial markets economy, continues to be used. In the latter case, the financing of businesses is essentially provided by the financial markets, and the open monetary market, articulated with the capital markets, is the preferred site of intervention for the central bank’s regulatory actions. The concept of the overdraft economy, by contrast, refers to those systems where financing is basically provided through credit, the volume of which presumes that the central bank itself extends credit to the ordinary banks through a variety of refinancing measures. Thus the contribution of liquidity from the monetary system to the economy, resulting from the primary indebtedness of the productive sector, has an endogenous origin.