When are Interest Rates Exogenous?

Abstract

Paper for a conference in honor of Basil Moore: Complexity, Endogenous Money, and Exogenous Interest Rates, January 7-11, 2004, Stellenbosch, South Africa. Perhaps the most important of Basil Moore's contributions to economic theory is the recognition that the money supply should be treated as an endogenous variable while the interest rate should be taken to be exogenous. The first proposition has been accepted by virtually all Post Keynesians, while the second was more problematic and briefly resulted in rival horizontal and structuralist approaches. This paper explores several issues surrounding interest rate exogeneity: first, what we mean by the term exogeneity; second, which interest rate(s) is(are) directly administered by policy; third, whether interest rate exogeneity is in some sense natural or whether it follows from particular institutional arrangements, and whether it applies over all stages of the business cycle; and, finally, implications arising from adoption of an exogenous interest rate for Keynes's liquidity preference theory and Minsky's financial instability hypothesis.