Post Keynesian Monetary Economics

Post Keynesian Monetary Economics

Post Keynesian Monetary Economics

Post Keynesian Monetary Economics

Excerpt

Post Keynesian monetary economics is far from settled. This book is a critical overview of some of its central themes. It bears keeping in mind, however, that modern monetary policy can be said to have started four years after the March 1951 Treasury-Federal Reserve Accord—during the 1955-57 expansion when discretionary open market operations were first applied as the main tool of monetary policy. It is a bit difficult to believe that monetary policy, as we know it today, has been around for only thirty years, but it is so and this sober fact should be kept clearly in mind.

During this brief time the two major schools of monetary policy were the neoclassical Keynesians with their IS-LM models of fine‐ tuning, and the monetarists who started their rapid climb to dominance in the 1960s. Post Keynesian monetary economics rejects both of these approaches and it does so largely by reversing the causal arrow of the quantity theory of money. The money supply is seen as a function of nominal income rather than the other way around. What this amounts to is an endogenous theory of the money supply. More accurately, Post Keynesian monetary theory focuses on the flow of credit-money from the banking system to the business sector of the economy; or, alternatively stated, the causal arrow is, contrary to the usual textbook formulation, from the asset to the liabilities side of the banking industry's balance sheet. As will be argued in the text, this is more in keeping with Keynes Treatise than with the General Theory's portfolio-asset approach of liquidity preference theory.

If there is a leitmotif in this study, it is that the problem of financial innovations has been largely ignored by Post Keynesians. It needs to be incorporated into the theory of an endogenous money supply. Chapter 5 attempts to do so. And if this book can be said to have one single point . . .

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