News

A recent Bank of England Quarterly Bulletin claims that the information written in widely used economics textbooks is incorrect. The false information in question teaches the Credit Creation Model, which explains how money is created. This method is taught at the University of Otago in BSNS104, The Principles of Economics, and ECON112, The Principles of Economics 2.

Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate wrote the piece, “Money Creation in the Modern Economy.” The basis of the article was the issue that “how money is created differs from the story found in some economics text books.” It stated, “The Central Bank does not in practice choose the amount of money in circulation. Nor is the Central Bank money ‘multiplied up’ into more loans and deposits.” Instead, “The Bank of England implements monetary policy, which is set to be consistent with low and stable inflation, by setting the interest rate on central bank reserves.”

Critic spoke with the University’s Dr. Dan Farhat, who specialises in computational economics. Dr. Farhat said, “The issue you might come across is that in every economy, money is created very differently. If you’re thinking of how the central bank makes money for the economy, different central banks have different sorts of strategies.”

Dr. Farhat said that most of the textbooks printed generally tend to adopt an American approach to economics. He stated, “When I teach it to my students, I adjust it so that it’s the New Zealand approach.” He said he does not teach what’s directly in the textbook for this particular topic, instead focusing on “the basics that all students should know about the New Zealand Monetary Policy.”

Dr. Farhat said, “At the principles level, [the economics department] relies on a textbook that was made in New Zealand, which has the New Zealand money creation policy in it.”

The textbook used in BSNS104 is a University of Otago custom edition, which focuses on teaching economics in a way that relates to the New Zealand economy. The textbook has been pulled from a world-renowned economist, Gregory Mankiw. Mankiw wrote a series of economic textbooks which are used worldwide. Dr. Farhat said, “What happens is people in other countries pull pieces from his [Mankiw’s] textbook, then add their own pieces which relate to their own economy.”