Endogenous vs. Exogenous Money

There is a great twitter debate going on right now on this topic.

Cullen wrote a post today on how money is always endogenous, even in the long run. Some people disagree.

The participants are so far: Cullen, Noah Smith, Edward Harrison, David Beckworth, Ramanan Iver, Miles Kimball, me to a very small extent, and a few others. Sorry if I missed anyone.

I’d imagine we will get some posts out of a few of them, and I hope Frances Coppola chimes in at some point. My take is: The accounting says money is always endogenous, in both long and short run. If it is endogenous in the.

We can see this directly from excess bank reserves vs. NGDP, right? We have lots of channel stuffing today in the amount of excess bank reserves, but NGDP isn’t really going up any more or less than before. Even IOR doesn’t matter in this case, because the money is still out there.






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3 years 10 months ago

The whole conversation started when Noah said the mainstreamers all understand endogenous money. I own Mishkin’s Banking and Money text as well as Mankiw’s Principles of Macro. Neither of them discuss endogenous money in the PK sense. They both have full sections on the money multiplier though. Noah’s just trying to claim the neoclassicals understand something they clearly don’t. Anyone who paid attention to the Keen vs Krugman thing a few months back knows how deep this divide is.

Frankly, I am a little disappointed to see Noah trying to claim such nonsense. He’s dead wrong. And I found it kind of humorous when he wouldn’t tell me which text he teaches his students with….because he knew it didn’t have endogenous money in it….So I went to the Stony Brook site and looked up their required texts. Not surprisingly, he uses Mankiw’s Principles. Ha.

3 years 10 months ago

Hah yeah, they seem to be using a completely different definition of “endogenous money” from what is commonly understood to be “endogenous money” ranging back to the early 20th century (at least by the 1930s). I mean the fact that Miles Kimball says this:
” To me, the money supply matters because it affects the interest rate, and through that, output and inflation.”

is in direct contradiction to the common parlance of endogenous money, as that’s a clear version of the Loanable Funds model.

3 years 10 months ago

These chunks of convo look to be the best for laying out each side’s position-



It seems both sides should be able to understand each other, even if both sides don’t agree on the effectiveness of different policies.

3 years 10 months ago

What about when required reserves approach available reserves. At that point, the Fed has the option to limit reserve creation to constrain monetary growth. It may, in practice, never exercise that option. Then again, I suppose it essentially surrenders that right by targeting an overnight interest rate?