Endogenous Money, Non-neutrality and Interest-sensitivity in the Theory of Long Period Unemployment
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.
|Date of creation:||01 May 2006|
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