Giuseppe Fontana

Post Keynesian Approaches to Endogenous Money: A time framework explanation

Over the last two decades, work on the Post Keynesian theory of endogenous money has been flourishing, and has prompted a rethinking of the complex nature of money in modern economies. At the heart of the debate between what have now been labelled the accommodationist (or horizontalist) approach and the structuralist approach to endogenous money are the issues of the slope of the supply curves of reserves and of credit money, respectively. Using the distinction between a single period analysis and a continuation analysis, similarities and differences between those approaches are explained, and the suggestion is then made for retaining and re-interpreting them into a more general theory.

Are Long-Run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long- run price stability—i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.

Post Keynesians and Circuitists on Money and Uncertainty: An Attempt at Generality

Ever since Keyness (1933) seminal work, several economists have drawn a distinction between the orthodox theory of a barter economy and the radical project of a monetary theory of production (cf., for example, Davidson, 1978; Rotheim, 1981; de Carvalho, 1992). Two of the most active groups of scholars that have insisted on that difference have been Post Keynesians (e.g., Arestis, Chick, Davidson) and Circuitists (e.g., Graziani, Lavoie, Parguez, Schmitt), respectively (cf. Deleplace and Nell, 1996). The Post Keynesian approach and the Monetary Circuit approach are not so much schools of thought as ways of thinking about monetary problems. Within the Post Keynesian camp itself, for instance, there are many perspectives, for example, accommodationists and structuralists (cf. Fontana, 1999b). The Monetary Circuit approach boasts an even less united group of economists. In fact, many economists working in that tradition, for example, Schmitt, do not accept the term itself. However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis (cf. Arestis, 1996, and Parguez, 1996, respectively). More importantly, Post Keynesians and Circuitists share a genuine commitment to understand the nature and functions of money in modem economies. As scholars working in the tradition of Keyness monetary theory of production, they firmly believe that money matters. Money is not neutral either in the short or in the long run.

Monetary Policy Rules: What Are We Learning?

Abstract: The paper shows that the “monetary policy rules and inflation targeting” literature and the” endogenous money” literature share a reaction function approach to central banking policy. Monetary aggregates are the outcome of the price-maker and quantity-taker behavior of central banks in the reserve market, and of banks in the loans market. However, the paper argues that any process of convergence between those two approaches has to confront the following four critical areas: (a) the meaning of endogenous money, (b) the theory of inflation, (c) the theory of interest rates, and (d) the long-run role of money.

Financialization, the Great Recession, and the Stratification of the US Labor Market

This contribution explores the possibility that the financialization of the US economy has created identity preference effects by linking managerial and financial occupations to high earnings, and in turn high earnings to the social status of the dominant demographic group in the labor force, namely white men. The empirical results for the 1983–2009 period confirm that a wage premium exists for individuals working in managerial and financial occupations, and that this finance wage premium is not equally distributed among all gender and ethnic groups. For each ethnic group, men have taken an increasing share of the finance wage premium at the expense of women. More specifically, white – and, to a lesser degree, Hispanic – men have enjoyed a disproportionate share of the finance wage premium. Financialization has thus been neither race nor gender neutral, and is at least in part responsible for the stratification effects of the Great Recession.

Why money matters: Wicksell, Keynes, and the new consensus view on monetary policy

One of the greatest achievements of the modern mainstream approach to monetary policy is to have rejected the old quantity-theoretic framework, and to have replaced it with a Wicksellian two-interest-rate analysis, which closely reflects the actual behavior of central banks around the world. Starting with a presentation of Wicksells two-interest-rate analysis and its policy implications, this paper evaluates these recent developments in monetary thought and monetary policy in terms of the acceptance or not of the axiom of neutrality of money and monetary policy.

Monetary Policy Uncovered: Theory and Practice

This paper discusses the current ‘new consensus’ view on monetary policy and the theoretical framework on which that practical view relies, namely, the ‘targets-and-instrument approach’. We argue that in the modern world of financial innovation and liability management central banks cannot choose between an interest rate-targeting policy and a money-targeting policy. A money-targeting regime is not desirable, if not unfeasible. In addition, in the context of Pooles approach to the ‘instrument’ problem, the implementation of a money-targeting regime would raise the expected value of the loss function of the central bank and would thus shift the balance in favour of an interest-rate targeting regime.

Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics

In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. Given the size of the public sector and the increasing role of fiscal policy in modern economies, this simplifying assumption of the NCM model is difficult to defend. This paper maintains that conventional arguments used to support this controversial assumption--including historical reasons, theoretical propositions, and practical issues--do not have solid foundations. There is, in fact, nothing inherently monetary in the stabilization policies found in the model. Thus, fiscal policy could play a role at least as important as monetary policy in the NCM model.

Endogenous Money: An Analytical Approach

The paper proposes a constructive interpretation of the Post Keynesian debate between horizontalists and structuralists. Both approaches defend an endogenous money theory, but they discriminate between different analyses of the credit market and the reserve market. A more general model encompassing both approaches is presented here and some of its implications are discussed. Copyright (c) Scottish Economic Society 2003.

Macroeconomics, endogenous money and the contemporary financial crisis: a teaching model

This paper develops an undergraduate macroeconomics teaching model that features endogenous money and an explicit account of commercial bank behaviour. It therefore transcends common shortcomings of existing teaching models based on either IS-LM or its successor, the New Consensus. The model is used to explain the recent financial crisis and its macroeconomic impact, and to analyse the effects and potential shortcomings of monetary and fiscal policy responses to the crisis.