Abstract
The 2010s have witnessed a new shift in central banking and, partially at least, in monetary economics and macroeconomic modelling. It is a fact that the endogenous money theory has been gradually clawing back popularity at the expense of the classical theory of interest rates, the financial intermediation view of banks, the money-multiplier story and the quantity theory of money. However, the loanable funds theory and the view of banks as pure financial intermediaries (sometimes coupled with the money-multiplier story) are still sometimes invoked. In addition, the dynamic process of creation, circulation and destruction of money is usually neglected. The point is that money endogeneity is still regarded by many mainstream economists as a mere empirical fact, not a key feature of capitalist market-based economies to be properly explained by a logically consistent theory. By contrast, dissenting economists have further advanced the endogenous money view through: (a) a generalised theory of the endogenous process of money creation; (b) the increasing popularity of modern monetary theory in the public debate; and (c) the development of aggregative stock–flow consistent models and agent-based stock–flow consistent models as an alternative to dynamic stochastic general equilibrium models.
Highlights
According to Sir John Hicks, ‘monetary theory ... belongs to monetary history’ (Hicks 1967)
Looking at the academic literature as well as the policies of central banks and other international institutions, endogenous money views have been gradually clawing back popularity at the expense of the classical theory of exogenous money, where the latter has often taken the form of the loanable funds theory of the interest rate, the pure financial intermediation view of banks, the money-multiplier analyses and the quantity theory of money (QTM) (Realfonzo 1998)
The main conclusion of this section is that, as mainstream theorists and policymakers have failed to embrace the original tenets of the endogenous money theory (EMT), the EMT itself has moved on, due among other things to: (a) a generalised theory of the endogenous process of money creation based on the distinction between single- and continuation-period analyses; (b) the increasing popularity of the modern monetary theory (MMT) in the public debate; and (c) the development of aggregative stock–flow consistent (SFC) models and agent-based stock–flow consistent (AB–SFC) models
Summary
According to Sir John Hicks, ‘monetary theory ... belongs to monetary history’ (Hicks 1967). As Joseph Schumpeter maintains, in the field of money some theoretical ideas can often be contradicted by practical considerations (Schumpeter 1954). Drawing on these insights, one of the goals of this paper is to critically assess recent developments in both mainstream and non-mainstream monetary. Have mainstream economists and policy-makers embraced the endogenous money theory (EMT)?
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