The Nature and Role of Monetary Policy When Money is Endogenous

Levy Economics Institute Working Paper No. 374

30 Pages Posted: 4 Jun 2003

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Malcolm C. Sawyer

Levy Economics Institute

Multiple version iconThere are 2 versions of this paper

Date Written: March 2003

Abstract

This paper considers the nature and role of monetary policy when money is envisaged as credit money endogenously created within the private sector (by the banking system). Monetary policy is now based in many countries on the setting (or targeting) of a key interest rate, such as the Central Bank discount rate. The amount of money in existence then arises from the interaction of the private sector and the banks, based on the demand to hold money and the willingness of banks to provide loans. Monetary policy has become closely linked with the targeting of the rate of inflation. In this paper we consider whether monetary policy is well-equipped to act as a counter-inflation policy and discuss the more general role of monetary policy in the context of the treatment of money as endogenous. Currently, two schools of thought view money as endogenous. One school has been labeled the "new consensus" and the other the Keynesian endogenous (bank) money approach. Significant differences exist between the two approaches; the most important of these, for the purposes of this paper, is in the way in which the endogeneity of money is viewed. Although monetary policy - essentially interest rate policy - appears to be the same in both schools of thought, it is not. In this paper we investigate the differing roles of monetary policy in these two schools.

Keywords: monetary policy, new consensus, endogenous money

JEL Classification: E5, E52

Suggested Citation

Arestis, Philip and Sawyer, Malcolm C., The Nature and Role of Monetary Policy When Money is Endogenous (March 2003). Levy Economics Institute Working Paper No. 374. Available at SSRN: https://ssrn.com/abstract=386863 or http://dx.doi.org/10.2139/ssrn.386863

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Malcolm C. Sawyer

Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States
845-758-7700 (Phone)
845-758-1149 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
225
Abstract Views
1,839
rank
141,284
PlumX Metrics