Teaching endogenous money with systems thinking and simulation tools

Abstract

This paper is primarily for instructors seeking new ways to teach the endogenous view of money creation, i.e., that money supply responds to the economy's credit demands, in contrast to the textbook money multiplier view that central banks can unilaterally adjust the monetary base to trigger desired changes in the money supply. Our approach helps students visualise endogenous money in a transparent conceptual model, and also learn to use a simulation model that demonstrates endogenous money dynamics. One experiment shows how a bank lending process infused with animal spirits can cause a central bank to lose control of the money supply even while it maintains control of interest rates. The paper has two additional purposes with a broader audience in mind. It proposes a consensus-building definition of endogenous money to mean 'created by an endogenous feedback structure'. And, it demonstrates how system dynamics is used as a method of scientific inquiry as well as a simulation tool.