Endogenous money theory: A unique alternative?

Abstract

Modern monetary policy, applied in developed and developing countries, is based on economic theories that have been in existence for 300 years. These theories, considered for the purpose of this thesis as the New Consensus theory, have its roots in the classical quantity theory of money, Milton Friedman's monetarism, and the rational expectations variant of New Classical and New Keynesian economics. Fundamentally, this theory assumes changes in the money supply have only limited impact on real economic variables such as unemployment and output in the long run. The primary monetary policy derived from this theory is reduction of inflation, with limited regard for other policy goals such as output or income growth. This thesis presents an alternative theory of money with roots in Keynesian economics. Endogenous money provides the framework for the discussion of the non-marxist foundations of alternative economic schools of thought. Various strands of the Post-Keynesian approach-circuitist, accomodationist, structural-- are compared for their relevance in the development of an alternative monetary policy. The primary theoretical disagreements within the PostKeynesian approach revolve around the slope of the money supply, circulation theory, and liquidity preference. Key policy differences that appear to transcend the theoretical disagreements, and present a unified policy alternative to monetarist theory include the acceptance of state intervention, the use of incomes policy to promote economic growth, and a rejection of laissez-faire. Post-Keynesian monetary theory provides a coherent theory distinct from mainstream theory and produces a unique alternative to the mainstream thought on the creation and the use of money as both an economic variable and an institution. But, despite its inner consistency and coherence, the lack of formal modeling and practical empirical testing of its core assumptions and its policy effectiveness results in a weak alternative to mainstream monetary theory.

Date of Award	2006
Original language	American English
Awarding Institution	Eastern Illinois University
Supervisor	Eric Hake (Supervisor)