Development and Underdevelopment in the History of Economic Thought

Is There a Room for Money Supply Endogeneity in Mainstream Macroeconomics?

Ostapenko Vsevolod, St. Petersburg State University

The integration of money and banking into macroeconomic models has a long history. Great retrospective on the issue of macro-financial linkages is provided in the recent book by Ingrao & Sardoni (2019). My paper complements their research in one certain aspect: I investigate into the evolution of money supply modelling in contemporary mainstream. Chapter 9 of (Ingrao & Sardoni, 2019) is devoted to the analysis of credit system and financial markets within the New Neoclassical Synthesis in a broad context, but they do not concentrate specifically on money supply and omit the debates around its endogeneity initiated by post-Keynesians (though in section 9.5 the “old” and “new” views of banks are discussed). Traditionally origins of modern endogenous money approach date back to Moore (1988), though earlier contributions of Kaldor and others could be mentioned. In his book Moore criticizes mainstream approach to money supply as a “verticalist view”, where it is exogenous and perfectly controlled by the central bank. Banking system in this paradigm only fulfills the function of “intermediation of loanable funds”. Under endogenous money supply (“horizontalist view”, which was later subject to internal critique from the PK camp) it is demand-driven, and the monetary regulator only sets the benchmark interest rate with almost no effect on the quantity of money. Many scholars claim that state-of-the-art mainstream general equilibrium models are fundamentally “non-monetary” and correspond to the strand of real analysis in Schumpeter’s terminology (Bofinger & Ries, 2017). At the same time, it is often stated that mainstream macro has already accepted the idea of endogenous money in some adjusted version – both in research (Rochon & Rossi (eds), 2015, p.158) and in pioneering undergraduate textbooks (Carlin & Soskice, 2015). I ask whether mainstream really embraced the concept of endogenous money supply and trace the historical path from RBC to today’s HANK models.


Keywords: monetary theory, money supply, endogenous money, Post Keynesian economics, New Keynesian economics, DSGE models

Paper file