Question

In your view, is the supply of money exogenous or endogenous? In your answer refer
to both theoretical arguments and empirical evidence, and be sure to discuss what you
mean by 'money'.
Word Limit – 750

Answer 1

Money is and has always been an endogenous phenomenon, owing to its being essentially tied to the nature of debt and the need for a means of final payment that has to be provided by a third party on the agents' demand.” The endogeneity of money does not depend on any.

Endogenous money is an economy’s supply of money that is determined endogenously that is, as a result of the interactions of other economic variables, rather than exogenously by an external authority such as a central bank.

The theoretical basis of this position is that money comes into existence through the requirements of the real economy and that the banking system reserves expand or contract as needed to accommodate loan demand at prevailing interest rates.

Central banks implement policy primarily through controlling short-term interest rates. The money supply then adapts to the changes in demand for reserves and credit caused by the interest rate change. The supply curve shifts to the right when financial intermediaries issue new substitutes for money, reacting to profit opportunities during the cycle.

Endogenous money is widespread in economic theory. The post‐Keynesian contribution is identification of a causal link between bank lending and the money supply. Though driven by macroeconomic concerns, the post‐Keynesian debate has reduced to a microeconomic debate over the role of financial intermediaries in the accommodation process. In the IS - LM model endogenous money flattens the LM. This misses its substantive significance which is the discrediting of monetarist money supply policy rules and monetarist critiques of central banking, its identification of the key role of credit, and its provision of a credit‐driven theory of the business cycle.