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Chapter 3: Endogenous Money: Structuralist
3 Endogenous money: structuralist Sheila C. Dow* 1. Introduction It is now a widely held view that the money supply is not under the full control of the monetary authorities, that is, that it is (at least in part) endogenous to real private sector economic processes. This has long been the view of those who study the actual workings of banking systems. But the inability of the authorities to control the money supply became most evident during the 1980s when attempts were made at such control in the name of monetarist theory. The practice of monetary policy now, in the USA, the UK and the Euro-zone, is therefore explicitly focused on setting the rate charged on borrowed reserves (in the form of the repo rate1) rather than targeting a particular rate of growth of the money supply. It is therefore now increasingly (though by no means universally) accepted that the money supply should be treated as an endogenous variable in monetary theory. This is the case across a wide spectrum of modern theoretical approaches, including the neoclassical theory of monetary policy (as in Goodhart, 1984) and new classical business cycle theory (as in McCallum, 1986), as well as, more traditionally, in the post-Keynesian approach. The view that the money supply is endogenous has a long pedigree,2 which, contrary to popular belief, includes Keynes (Moore, 1988; Dow, 1997a). The literature is rich, reﬂecting the several senses in which the money supply may be seen to be endogenous (Rousseas, 1986:...
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