Abstract
ABSTRACT Money is at the center of macroeconomics, which makes understanding the money supply central for macroeconomic theory. This paper presents the Post Keynesian theory of endogenous money supply and shows how it is fundamentally different from the conventional money supply theory. The conventional approach relies on the money multiplier and bank lending is invisible. Post Keynesian theory discards the money multiplier and focuses on bank lending which drives money creation. The paper emphasizes the structuralist version of Post Keynesian theory which retains Keynes’ liquidity preference theory of long term interest rates and also recognizes banks are subject to financial constraints that limit their lending activities. The paper then shows how to derive the LM schedule in an endogenous money economy, which is a necessary prelude to reconstructing the ISLM model.
Highlights
Money is at the center of macroeconomics and understanding the determination of the money supply is critical for macroeconomic theory
This paper shows how Post Keynesian endogenous money theory is fundamentally different from conventional money multiplier theory
The endogenous money LM schedule is a necessary prelude for reconstruction of the ISLM model
Summary
Money is at the center of macroeconomics and understanding the determination of the money supply is critical for macroeconomic theory. That explains the Post Keynesian focus on the theory of endogenous money. This paper shows how Post Keynesian endogenous money theory is fundamentally different from conventional money multiplier theory. It derives the LM schedule for an endogenous money economy using the structuralist approach to endogenous money which emphasizes the significance of portfolio choices and microeconomic constraints on individual banking firms. The endogenous money LM schedule is a necessary prelude for reconstruction of the ISLM model
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