Some observations about the endogenous money theory
AbstractThe endogenous money theory constitutes the core element of the post-keynesian monetary theory. The first formulation of this theory can be found in the works of Kaldor published in the 1970s. Taking these studies as a starting point, the post-keynesians elaborated two versions of the endogenous money theory which differ in their assumptions about the behaviour of the monetary authorities and the banking system, and hence offer different conclusions about the slope of the money supply curve. The aim of this paper is to evaluate the importance of the endogenous money theory using a criterion which can be defined on the basis of Keynes’s distinction between a real exchange economy and a monetary economy. As is well known, Keynes (1933a, 1933b) uses the former term to refer to an economy in which money is merely a tool to reduce the cost of exchange and whose presence does not alter the structure of the economic system, which remains substantially a barter economy. A monetary economy instead refers to an economic system in which the presence of fiat money radically changes the nature of exchange and the characteristics of the production process. Keynes (1933a, p. 410) notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded and stressed the need to elaborate a ‘monetary theory of production, to supplement the real–exchange theories which we already possess’ (Keynes, 1933a, p. 411). The specification of the elements determining the non-neutrality of money is thus the key factor differentiating Keynes’s theory from the classical one.1 The criterion used to evaluate the significance of the endogenous money theory is whether it enables us to elaborate on and to broaden the explanation of the justification the nonneutrality of money formulated by Keynes. In The General Theory the reasons for the non-neutrality of money are grounded in the store of wealth function of money; the liquidity preference theory is the element on which the keynesian explanation of income fluctuation is based. The importance of the money endogeneity theory can therefore be assessed in relation to its ability to specify determinant factors for the non-neutrality of money that have not been highlighted by the liquidity preference theory; in other words, the significance of the endogenous money theory depends on its capacity to bring out elements of a monetary economy that have been overlooked in the liquidity preference theory. This paper presents the following results. First of all, it shows that the endogenous money theory makes it possible to extend the analysis of the factors accounting for the non-neutrality of money beyond what Keynes has done in The General Theory; in particular this paper argues that the theory of money endogeneity obtains this result by underlying the means of payment function of money. Second, the work shows that the money endogeneity theory gives credence to certain points developed by Keynes in some works published in 1933 and between 1937 and 1939. Third, the work emphasises that the novel aspects of the money endogeneity theory do not depend on the particular version of this theory, i.e. they do not depend on the slope of the credit supply curve. Finally, in the paper the most significant aspects of the money endogeneity theory are presented by means of a theoretical model that distinguishes clearly between the credit market and the money market. It is shown that an important element of the money endogeneity theory is that it elaborates an alternative credit theory to the neoclassical one. The paper is divided into three parts. In the first one, the most relevant aspects of the money endogeneity theory are presented starting from Kaldor’s work, and we bring out the consistency between that theory and the considerations formulated by Keynes in some writings which preceded and followed the publication of The General Theory. In the second part the two versions of the money endogeneity theory are analysed and it is noted that the debate between the supporters of these two versions risks overshadowing the innovative aspects of the money endogeneity theory that do not depend on the slope of the credit and money supply curves. Then in the third part, the aspects that distinguish a monetary economy from a real-exchange economy and that emerge because of the money endogeneity theory are described.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of Insubria in its series Economics and Quantitative Methods with number qf0602.
Length: 38 pages
Date of creation: Feb 2006
Date of revision:
Contact details of provider:
Postal: Via Ravasi 2-21100 Varese
Web page: http://www.uninsubria.it/uninsubria/facolta/econo.html
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-23 (All new papers)
- NEP-CBA-2007-01-23 (Central Banking)
- NEP-HPE-2007-01-23 (History & Philosophy of Economics)
- NEP-MAC-2007-01-23 (Macroeconomics)
- NEP-MON-2007-01-23 (Monetary Economics)
- NEP-PKE-2007-01-23 (Post Keynesian Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Romer, 2000.
"Keynesian Macroeconomics without the LM Curve,"
NBER Working Papers
7461, National Bureau of Economic Research, Inc.
- Bertocco Giancarlo, 2003.
"The characteristics of a monetary economy: a Keynes-Schumpeter approach,"
Economics and Quantitative Methods
qf0311, Department of Economics, University of Insubria.
- Giancarlo Bertocco, 2007. "The characteristics of a monetary economy: a Keynes--Schumpeter approach," Cambridge Journal of Economics, Oxford University Press, vol. 31(1), pages 101-122, January.
- Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633.
- Lavoie, M, 1995.
"Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk,"
9513e, University of Ottawa, Department of Economics.
- Lavoie, Marc, 1996. "Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(3), pages 275-300, August.
- Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
- Kaldor, Nicholas, 1980. "Monetarism and UK Monetary Policy," Cambridge Journal of Economics, Oxford University Press, vol. 4(4), pages 293-318, December.
- Kaldor, Nicholas, 1972. "The Irrelevance of Equilibrium Economics," Economic Journal, Royal Economic Society, vol. 82(328), pages 1237-55, December.
- Kaldor, Nicholas, 1975. "What Is Wrong with Economic Theory," The Quarterly Journal of Economics, MIT Press, vol. 89(3), pages 347-57, August.
- Arestis, Philip & Howells, Peter, 1999. "The Supply of Credit Money and the Demand for Deposits: A Reply," Cambridge Journal of Economics, Oxford University Press, vol. 23(1), pages 115-19, January.
- Giuseppe Fontana, 2003. "Post Keynesian Approaches to Endogenous Money: A time framework explanation," Review of Political Economy, Taylor & Francis Journals, vol. 15(3), pages 291-314.
- L. Randall Wray, 1998.
- Giuseppe Fontana, 2000. "Post Keynesians and Circuitists on Money and Uncertainty: An Attempt at Generality," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 23(1), pages 27-48, October.
- Thomas I. Palley, 1996. "Accommodationism versus Structuralism: Time for an Accommodation," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 18(4), pages 585-594, July.
- Arestis, Philip & Howells, Peter, 1996. "Theoretical Reflections on Endogenous Money: The Problem with 'Convenience Lending.'," Cambridge Journal of Economics, Oxford University Press, vol. 20(5), pages 539-51, September.
- Trevithick, J A, 1994. "The Monetary Prerequisites for the Multiplier: An Adumbration of the Crowding-Out Hypothesis," Cambridge Journal of Economics, Oxford University Press, vol. 18(1), pages 77-90, February.
- Thomas I. Palley, 2002. "Endogenous Money: What it is and Why it Matters," Metroeconomica, Wiley Blackwell, vol. 53(2), pages 152-180, 05.
- Paul Davidson, 1991. "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 129-143, Winter.
- alberto, botta, 2011.
"Fiscal policy, eurobonds and economic recovery: some heterodox policy recipes against financial instability and sovereign debt crisis,"
33860, University Library of Munich, Germany.
- Alberto Botta, 2011. "Fiscal Policy, Eurobonds and Economic Recovery: Some Heterodox Policy Recipes against Financial Instability and Sovereign Debt Crisis," Economics and Quantitative Methods qf1114, Department of Economics, University of Insubria.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Segreteria Dipartimento).
If references are entirely missing, you can add them using this form.