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Endogenous Money, Non-neutrality and Interest-sensitivity in the Theory of Long Period Unemployment

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Abstract

This paper investigates the role played by endogenous money in models with interest-sensitive expenditures. In particular, it examines the impact of endogenous money on a baseline neoclassical model arguing against the frequently asserted claim that traditional neoclassical macroeconomics is compatible with endogenous money. It demonstrates firstly that endogenous money is a sufficient condition to render unstable a neoclassical model characterised by interest-sensitive expenditures, full employment and money neutrality. Secondly, it shows that the introduction of either money illusion on the part of workers or a Taylor rule governing monetary policy are alternative methods of stabilising models with interest-sensitive expenditures and endogenous money, though with different implications for the full employment and neutrality characteristics of the standard model. Thirdly, it raises questions about whether models which incorporate Taylor rules can be properly characterised as containing endogenous money and it provides an alternative interpretation of such models. The paper concludes by arguing that money supply endogeneity of the extreme or accommodationist type is of fundamental significance for the construction of a theory of long period unemployment but it identifies a set of remaining questions which need to be addressed in the advancement of this project.

Suggested Citation

  • Peter Docherty, 2006. "Endogenous Money, Non-neutrality and Interest-sensitivity in the Theory of Long Period Unemployment," Working Paper Series 148, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:wpaper:148
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp148.pdf
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    References listed on IDEAS

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    1. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720, December.
    2. 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.
    3. McCallum, Bennett T., 1986. "Some issues concerning interest rate pegging, price level determinacy, and the real bills doctrine," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 135-160, January.
    4. Garegnani, Pierangelo, 1984. "Value and Distribution in the Classical Economists and Marx," Oxford Economic Papers, Oxford University Press, vol. 36(2), pages 291-325, June.
    5. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    6. Thomas I. Palley, 2000. "The Case for Positive Low Inflation: Some Financial Market Considerations with Special Attention to the Problems of Japan," Eastern Economic Journal, Eastern Economic Association, vol. 26(3), pages 277-295, Summer.
    7. Milgate, Murray, 1977. "Keynes on the 'Classical' Theory of Interest," Cambridge Journal of Economics, Oxford University Press, vol. 1(3), pages 307-315, September.
    8. Garegnani, Pierangelo, 1979. "Notes on Consumption, Investment and Effective Demand: II," Cambridge Journal of Economics, Oxford University Press, vol. 3(1), pages 63-82, March.
    9. Peter Docherty, 2005. "Money and Employment," Books, Edward Elgar Publishing, number 2578, April.
    10. Louis-Philippe Rochon, 1999. "Credit, Money and Production," Books, Edward Elgar Publishing, number 1565, April.
    11. Cottrell, Allin, 1994. "Post-Keynesian Monetary Economics," Cambridge Journal of Economics, Oxford University Press, vol. 18(6), pages 587-605, December.
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    Cited by:

    1. Peter Docherty, 2008. "Money and Monetary Policy in a Kaldor-Pasinetti-Sraffa-Keynes Framework," Working Paper Series 153, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

    More about this item

    Keywords

    endogenous money; money neutrality; unemployment; interest-sensitivity;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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