What is Endogenous when Monetary Policy is Transparent?

Abstract

In the conventional Post Keynesian account of money supply determination (and the conduct of monetary policy), it is the rate of interest set by the central bank that is exogenously determined while the quantity of money is determined by the demand for bank loans, which in turn is dependent on the ‘state of trade’. Over the years, this simple statement of what Fontana calls ‘one of the main cornerstones of Post Keynesian economics’ (Fontana 2003: 291) has generated a certain amount of debate and subsequent refinement. Controversial issues have included (i) the role of the demand for money; (ii) the precise range of expenditures bearing upon the demand for credit; (iii) the importance of banks’ liquidity preference; and (iv) the extent to which central banks themselves contribute to endogeneity by passively supplying reserves. Palley’s recent comment that ‘For the last decade, the post-Keynesian approach to endogenous money has become bogged down in a debate between what have been called the ‘accommodationist’ and ‘structuralist’ approaches’ (Palley 2002: 152) is a reference to (iii) and (iv).