What precisely is endogenous money? Does the central bank always accommodate banks’ demand for central-bank money? Does it have the ability to increase the money supply exogenously? Can it really have the rate of interest of its choice? Has money always been endogenous or has it become endogenous through time with the advent of certain institutions? This volume shows that a proper understanding of money is still required, and that the institutional actions of central banks reveal how recent so-called unconventional policies are doomed to fail. Revisiting the fundamental elements of the theory of endogenous money leads to completely different sets of monetary policy recommendations.
Louis-Philippe Rochon and Sergio Rossi
The assumption that money can disturb economic activity has gained consensus across different schools of economic thought, but there remain differences in terms of the channels through which this occurs. Many economists consider that central banks can only set their rate of interest and are unable to control the money supply, thereby debt originates money, which has become structurally endogenous. This chapter analyses different heterodox approaches, highlighting the discussion on money creation and destruction, and explaining how this applies to developing economies, where demand for investment expenditure is limited and exchange rates have become increasingly important. The analysis focuses on the Mexican economy in the 1980–2007 period, just before the global financial crisis burst.
Scott T. Fullwiler
Neoclassical economists have traditionally focused on monetary policy strategies and largely neglected the details of their implementation. By contrast, the post-Keynesian tradition has incorporated monetary policy implementation for several decades as a core part of its critique of neoclassical models. This chapter describes ten principles underlying central-bank operations in general that one might consider to be ‘what every economist should know’. Many, if not most, of these principles are contrary to the standard neoclassical models and textbooks, and, with regard to the post-Keynesian literature, tend to favour the horizontalists’ view over the structuralists’ view.
This chapter clarifies different points that are the backbone of the debate between horizontalists and structuralists. It first draws a clear-cut distinction between money and bank deposits in order to set the record straight as regards the working of a single-bank system. It then elaborates on the role of the central bank in a multi-bank system, to show that even central-bank money is always and everywhere an endogenous phenomenon, owing to the need of a means of final payment on the interbank market. On these grounds, it explains a central bank’s interest-rate determination, referring to the Canadian case, which is a very efficient system for interest-rate control.
This chapter addresses the question of whether it is right to cede the case of commodity money to a quantity-theoretic analysis. There are two issues here: what is the ‘correct’ analysis of the case of commodity money, and what did the classical monetary theorists have to say on the matter? These issues are not really separable: in seeking an adequate analysis of commodity money, one is obliged to engage with those writers who have had the most to say on the subject.
Post-Keynesians disagree about whether money is intrinsically endogenous, or whether it has become endogenous over time with the emergence of modern central banking. In this chapter, monetary history and institutional analysis are brought to bear on the issue. The chapter examines two early monetary systems that lacked central banks: metallic money in fifteenth- to seventeenth-century western Europe, and paper money in eighteenth-century Britain and British North America. These systems are found to have been imperfectly endogenous, owing to inadequacies in their mechanics of supply. Furthermore, endogeneity did not evolve in an unremittingly forward path historically, as the literature suggests: in some respects, metallic-money systems were more flexible than paper-money systems.
Yannis Panagopoulos and Aristotelis Spiliotis
This chapter extends the horizontalist–structuralist debate about the money-supply process, taking into consideration the restrictions that emerged during the Basel III agreements. A two-step approach is proposed: first, the existence of a new ‘equity credit multiplier’ is examined, that is, the importance of banks’ equity in their lending process. Then, this ‘equity effect’ is embedded into a multivariate loan model. By applying this two-step approach to the euro area, the chapter concludes that there are strong empirical indications of money endogeneity in the system with a reversed ‘equity credit multiplier’.
John E. King
This chapter draws on Nicholas Kaldor’s pre-1960 writings on money, which have received less scholarly attention than his later work. They reveal that Kaldor was always an opponent of monetarism, even if he was not always a consistent critic of exogenous money. They also show that monetary endogeneity was never the central question for him, since his critique of the quantity theory was always much broader than this. Long before Margaret Thatcher made her celebrated declaration, Kaldor was vigorously denying that ‘there is no alternative’ to deflationary monetary policy as a remedy for inflation and affirming instead the case for incomes policy and commodity price stabilization.
This chapter provides a definition of the principle of effective demand that is consistent with The General Theory and applies it to illustrate Keynes’s claim for the existence of long-period unemployment equilibrium and as the basis for his policy proposals. The principle of effective demand is then applied to illustrate that although some post-Keynesian models incorporate the endogeneity and non-neutrality of money, these models do not capture the properties of the principle of effective demand, particularly the distinction between the rate of interest and the marginal efficiency of capital. From this perspective the endogeneity of money is an implication of Keynes’s proposal to gain control of the rate of interest by nationalizing the Bank of England.
This chapter reviews the main arguments put forward against the horizontalist view of endogenous credit and money and an exogenous rate of interest under the control of monetary policies. It argues that the structuralist arguments put forward in favour of an endogenously increasing interest rate when investment and economic activity are rising, owing to increasing indebtedness of the firm sector or decreasing liquidity in the commercial-bank sector, raise major doubts from a macroeconomic perspective. This is shown by means of examining the effect of increasing capital accumulation on the debt–capital ratio of the firm sector in a simple Kaleckian distribution and growth model.