The Making of Monetary Policy in Endogenous Money Theory: An Introduction

Abstract

Endogenous money theory has ancestors in the contributions of the Banking school and in the writings of Keynes, Kalecki, Robinson, Schumpeter, and Wicksell. In the 1970s and 1980s, Davidson (1977), Kaldor (1970), and Moore and Threadgold (1980) powerfully brought it forward against the monetarist view of the transmission mechanism. It is now one of the main cornerstones of Post Keynesian economics. Its foundations are built around the principle of interdependence between the monetary and real sectors: the stock of money in a country is determined by the demand for bank credit, and the latter originates in the needs of finance for productive and speculative activities. In a nutshell, money is credit-driven and demand-determined. As shown by the numerous contributions in this journal, but also in the Cambridge Journal of Economics, Journal of Economic Issues, Metroeconomica, and Review of Political Economy, endogenous money theory has recently been the object of intense internal and external debates. In particular, the last two decades have witnessed several refinements to its basic propositions, together with encouraging signs of fresh empirical evidence (for example, Arestis and Biefang-Frisancho Mariscal, 1995; Caporale and Howells, 2001; Deriet and Seccareccia, 1996; Hewitson, 1997; Howells and Hussein, 1999; Nell, 2000-2001; Palacio-Vera, 2001; Palley, 1994). As for the result of internal debates, Post Keynesians have advanced our understanding of the behavior of all agents involved in the money supply process. The different arguments have been presented in terms of the distinction between single-period analysis and continuation analysis (Fontana, 2001). The former is based on the assumption that the state