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Keynes and Macroeconomics After 70 Years

Keynes and Macroeconomics After 70 Years

Critical Assessments of The General Theory

Edited by L. Randall Wray and Matthew Forstater

In this substantial new collection, esteemed Post-Keynesian scholars reassess the relevance of Keynes’s The General Theory to a broad array of topic areas, ranging from the environment, investment finance, exchange rates, and socialism, as well as inquiries into general Post-Keynesian theory.

Chapter 10: Keynes on the Control of the Money Supply and the Interest Rates

Carlo Panico

Subjects: economics and finance, post-keynesian economics


Carlo Panico INTRODUCTION This chapter examines Keynes’s views on the ability of the monetary authorities to control the money supply and the interest rates. Its aim is to evaluate whether Keynes could agree on the horizontal slope of the money supply function, whether his position can be located in any one of the sides of the recent debates on the ability of the central bank to control the money supply, and whether it is this part of his contributions that makes his work depart from the traditional neoclassical approach. Keynesian economists emphasise that monetary policy tends to stabilise the interest rate at a specific level by letting the money supply accommodate the requirement of the economy. This idea was dominant at the time of the Radcliffe Report and during the two following decades.1 During the 1980s, the analysis of the money supply was at the centre of a large debate among Keynesian authors, some of whom have made the idea of the Radcliffe Report more stringent. Following the contributions of Moore, they have stated that in a credit money economy the central bank has no technical ability to control the monetary issue. The horizontal slope of the money supply thus has a necessary character, since variations in bank loans only depend on the decisions of bank borrowers, not of banks themselves (Moore, 1983, pp. 543–5), while the central bank is bound to perform a fully accommodating role of lender of last resort. These positions have been...

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