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Edited by Philip Arestis and Malcolm Sawyer
Chapter 15: Monetary Policy in an Endogenous Money Economy
Thomas I. Palley* 1. Constructing a post-Keynesian approach to monetary policy Monetary theory is a central concern of post-Keynesian (PK) economics, and endogenous money lies at the centre of that concern. However, PK theory has been bogged down in contentious debate surrounding the microeconomic details of the mechanisms of endogenous money. As a result, the macroeconomic and policy consequences of endogenous money have received inadequate attention. This is ironic given that combating the monetarist policy challenge was a major motivation for Kaldor’s (1970; 1982) initial formulation of endogenous money.1 The PK literature on monetary policy is surprisingly thin. Whereas much has been written on why monetary authorities are compelled to adopt interest rate operating procedures, there is little on how interest rates should be set given the adoption of these procedures.2 As a result, PK monetary policy has tended to reduce to the prescription that interest rates should be as low as possible – with little guidance as to what that constitutes. This chapter develops a PK framework for monetary policy, at the core of which is the endogeneity of money and ﬁnance. It transpires that distinguishing its policy recommendations from those of the mainstream is a subtle exercise. In several instances, despite signiﬁcant theoretical diﬀerences, PK policy recommendations are observationally equivalent to those of the mainstream. The chapter maintains that the deﬁning ‘observable’ diﬀerence between the mainstream and the suggested PK approach to monetary policy is quantitative regulation of ﬁnancial intermediary balance sheets. Eﬀective monetary...
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