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Central Banking and Post-Keynesian Economics

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  • Louis-Philippe Rochon
  • Sergio Rossi

Abstract

The Post-Keynesian theory of endogenous money has given much attention to the role of the central bank in the money creation process. Circuit theory has neglected this role, in so far as it has focused on the relationship between banks and firms within a monetary production economy. The aim of this paper is therefore twofold. First, it intends to fill this gap in circuit theory, by providing a role for the central bank in settlement of interbank debts. Secondly, it aims at reinforcing the Post-Keynesian analysis of central bank money by considering both the money-purveying and the credit-purveying roles of the settlement institution in the interbank market. The result of this analysis is a more comprehensive theory of endogenous money, where the lender-of-last-resort facilities of a central bank are viewed as an endogenous phenomenon involving both a money creation and a credit operation between the central bank and the domestic banking system. In such a framework, monetary policy consists of setting the base rate of interest at a level that enables banks to limit their bilateral debt position in the interbank market, so as not to disrupt the workings of the payment system by either an illiquidity or an insolvency crisis.

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  • Louis-Philippe Rochon & Sergio Rossi, 2007. "Central Banking and Post-Keynesian Economics," Review of Political Economy, Taylor & Francis Journals, vol. 19(4), pages 539-554.
    • Handle: RePEc:taf:revpoe:v:19:y:2007:i:4:p:539-554
    DOI: 10.1080/09538250701622402
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    References listed on IDEAS

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    1. Louis-Philippe Rochon & Sergio Rossi (ed.), 2003. "Modern Theories of Money," Books, Edward Elgar Publishing, number 2506.
    2. L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar Publishing, number 474.
    3. Graziani,Augusto, 2003. "The Monetary Theory of Production," Cambridge Books, Cambridge University Press, number 9780521812115.
    4. Louis-Philippe Rochon & Sergio Rossi (ed.), 2006. "Monetary and Exchange Rate Systems," Books, Edward Elgar Publishing, number 3828.
    5. Louis-Philippe Rochon, 1999. "Credit, Money and Production," Books, Edward Elgar Publishing, number 1565.
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    Cited by:

    1. Canale, Rosaria Rita, 2011. "Default risk and fiscal sustainability in PIIGS countries," MPRA Paper 32215, University Library of Munich, Germany.
    2. Nazim Kadri Ekinci, 2018. "Credit, Capital Flows and Monetary Policy: A Post-Keynesian Analysis," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 4(2), pages 55-74, December.
    3. Guido Traficante & Guglielmo Forges Davanzati, 2018. "La restrizione del credito in uno schema di teoria monetaria della produzione: il caso italiano," Moneta e Credito, Economia civile, vol. 71(283), pages 211-233.
    4. Nadia Oliva & Andrea Pacella, 2016. "The Ethics Inside the Monetary Circuit: How Bank’s Social Responsibility Affects Money Creation," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(7), pages 1-1, June.

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