Advances in Endogenous Money Analysis
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Advances in Endogenous Money Analysis

Edited by Louis-Philippe Rochon and Sergio Rossi

The endogenous nature of money is a fact that has been recognized rather late in monetary economics. Today, it is explained most comprehensively by the theory of money in post-Keynesian monetary theory. The expert contributors to this enlightening book revisit long-standing debates on the endogeneity of money from the position of both horizontalists and structuralists, and prescribe new areas of research and debate for post-Keynesian scholars to explore.
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Chapter 3: The theory of endogenous money and the LM schedule: prelude to a reconstruction of IS–LM

Thomas I. Palley

Abstract

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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