A Handbook of Alternative Monetary Economics
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A Handbook of Alternative Monetary Economics

Edited by Philip Arestis and Malcolm Sawyer

This major Handbook consists of 29 contributions that explore the full range of exciting and interesting work on money and finance currently taking place within heterodox economics. There are many themes and facets of alternative monetary and financial economics but two major ones can be identified.
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Chapter 15: Monetary Policy in an Endogenous Money Economy

Thomas I. Palley


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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