The Endogenous Money Approach

Abstract

In neoclassical theory, money is an exogenous variable: Money is neutral, merely determining nominal prices; and the supply of money is controlled by the central bank.

This paper delineates how Post Keynesians offer a clear alternative to the neoclassical approach. Topics discussed include: early Post Keynesian work, which emphasized uncertainty and money hoarding; circuit theory, which focused on money's role in financing spending; horizontalism, which pointed out the inability of the central bank to control reserves; endogenous money; neo-Chartalism, which looks at the role of the state in designating a unit of account for taxes and other monetary obligations; functional finance, which refuses to separate fiscal and monetary policy; the failure of monetary policy to affect unemployment; and the use of fiscal policy, via a government "buffer stock" of labor, to reduce unemployment.

Keywords: endogenous money, circuit theory, horizontalism, neo-Chartalism, functional finance, unemployment, buffer stock of labor