Considerations on Interest Rate Exogeneity
AbstractThe idea of an exogenous money supply—controlled entirely through centralbank interventions—was a fundamental tenet of monetarism and New Classical economics. Post Keynesians have developed an extensive literature arguing that the money supply is in fact endogenous—that market forces combine with central banks in establishing the money supply.But Post Keynesians disagree on a related question: to what extent are interest rates set exogenously by central banks? To address this issue, this paper presents evidence regarding the movement of market interest rates in U.S. financial markets relative to the Federal Reserve-controlled Federal Funds rate. Concluding that market interest rates are primarily set through market forces—i.e. are largely endogenous—the paper then discusses the primary source of interest rate endogeneity. This is the instability of deregulated financial markets, which leads market participants to make wide swings in their risk assessments over time. It follows that effective regulatory policies to stabilize markets and control interest rates directly will increase the degree of interest rate exogeneity. The paper concludes with proposals for establishing greater control over market interest rates.
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Bibliographic InfoPaper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp177.
Date of creation: 2008
Date of revision:
Find related papers by JEL classification:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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wp20, Political Economy Research Institute, University of Massachusetts at Amherst.
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