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Thomas I. Palley

This chapter presents the post-Keynesian theory of endogenous money supply and shows how it is fundamentally different from 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 chapter emphasizes the structuralist version of post-Keynesian theory, which retains Keynes’s liquidity-preference theory of long-term interest rates and also recognizes that banks are subject to financial constraints which limit their lending activities. The chapter then shows how to derive the LM schedule in an endogenous-money economy, which is a necessary prelude to reconstructing the IS–LM model.

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Thomas I. Palley

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Thomas I. Palley

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Thomas I. Palley

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Thomas I. Palley

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Thomas I. Palley

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Thomas I. Palley

This paper compares Cambridge and neo-Kaleckian growth theory. Both are members of the post-Keynesian approach to growth and distribution, but the Cambridge model is a hybrid of Keynesian and classical features whereas the neo-Kaleckian model is Keynesian. The Cambridge approach assumes full capacity utilization, while the neo-Kaleckian approach assumes variable capacity utilization. The two theories rely on fundamentally different theories of income distribution. The Cambridge model has a class structure of saving that generates Pasinetti's (1962) theorem regarding irrelevance of worker saving for steady-state growth and distribution. That class structure can be included in the neo-Kaleckian model, generating a variant of the Pasinetti result whereby steady-state capacity utilization is independent of worker saving. Fiscal policy has similar growth effects in the two models, albeit via very different mechanisms. Both models suffer from lack of attention to the labor market.

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Thomas I. Palley

This paper uses the occasion of the 25th anniversary of Basil Moore's book, Horizontalists and Verticalists, to reassess the theory of endogenous money. The paper distinguishes between horizontalists, verticalists, and structuralists. It argues Moore's horizontalist representation of endogenous money was an over-simplification that discarded important enduring insights from monetary theory. The structuralist approach to endogenous money retains the basic insight that the money supply is credit-driven but remedies horizontalism's omissions and over-simplifications. Twenty-five years later, horizontalism has largely morphed into structuralism. The theoretical challenge going forward is to develop the role of money and finance in a Keynesian theory of output determination. As regards monetary policy, the challenge is how to conduct policy in a world of endogenous money. These concerns emanate naturally from a structuralist perspective on endogenous money.

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Thomas I. Palley

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Thomas I. Palley

Prior to the 2008 financial crisis there was much debate about global trade imbalances. Prima facie, the imbalances seem a significant problem. However, acknowledging that would question mainstream economics’ celebratory stance toward globalization. That tension prompted an array of theories which explained the imbalances while retaining the claim that globalization is economically beneficial. This paper surveys those new theories. It contrasts them with the structural Keynesian explanation that views the imbalances as an inevitable consequence of neoliberal globalization. The paper also describes how globalization created a political economy that supported the system despite its proclivity to generate trade imbalances.