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Considerations on Interest Rate Exogeneity


  • Robert Pollin


The 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.

Suggested Citation

  • Robert Pollin, 2008. "Considerations on Interest Rate Exogeneity," Working Papers wp177, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp177

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    References listed on IDEAS

    1. Robert Pollin & Dean Baker & Marc Schaberg, 2003. "Securities Transaction Taxes for U.S. Financial Markets," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 527-558, Fall.
    2. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-115, March.
    3. Hyman P. Minsky, 1957. "Central Banking and Money Market Changes," The Quarterly Journal of Economics, Oxford University Press, vol. 71(2), pages 171-187.
    4. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, June.
    5. Davidson, Paul & Weintraub, Sidney, 1973. "Money as Cause and Effect," Economic Journal, Royal Economic Society, vol. 83(332), pages 1117-1132, December.
    6. Giovannini,Alberto (ed.), 2008. "Finance and Development," Cambridge Books, Cambridge University Press, number 9780521057561, March.
    7. Robert Pollin & Mwangi wa Githinji, 2008. "An Employment-Targeted Economic Program for Kenya," Books, Edward Elgar Publishing, number 13219.
    8. Harvey, David, 2007. "A Brief History of Neoliberalism," OUP Catalogue, Oxford University Press, number 9780199283279, June.
    9. Marc Lavoie, 2005. "Monetary base endogeneity and the new procedures of the asset-based Canadian and American monetary systems," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(4), pages 689-709.
    10. L. Randall Wray, 2006. "When are Interest Rates Exogenous?," Chapters,in: Complexity, Endogenous Money and Macroeconomic Theory, chapter 15 Edward Elgar Publishing.
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    Cited by:

    1. Guillermo Gigliani, 2014. "The Reform of the Federal Reserve in 2008: Is the Money Supply Endogenous or Exogenous?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(71), pages 73-94, December.

    More about this item

    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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