Chapter 7: The Nature and Role of Monetary and Fiscal Policy when Money is Endogenous
7. The nature and role of monetary and ﬁscal policy when money is endogenous 1 INTRODUCTION The concept of endogenous (bank) money is a particularly important one for macroeconomic analysis, especially within Keynesian economics. Bank money provides a more realistic approach to money in comparison with the exogenous, controllable money approach (in the sense that it is widely recognized that most money in an industrialized economy is bank money). Further, the concept of endogenous money ﬁts well with the current approach to monetary policy based on the setting (or ‘targeting’) of a key interest rate by the central bank. In the case of endogenous money, the causal relationship between the stock of money and prices is reversed as compared with the exogenous money case. Endogenous money plays an important role in the causal relationship between investment and savings: put simply, the availability of loans permits the expansion of investment, which leads to a corresponding expansion of savings and to an (at least temporary) expansion of bank deposits. There are currently two schools of thought that view money as endogenous. One is the ‘new consensus’ macroeconomics (NCM) discussed throughout this book, but at length in Chapter 2, and the other is the Keynesian endogenous (bank) money. There are signiﬁcant differences in the two approaches: the most important, for the purposes of this chapter, is in the way endogeneity of money is viewed. We discuss the view of money in the NCM approach in the next section, and then the Keynesian...
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