Money is Endogenous: Today is Yesterdays Long Run

JKH once again says something hugely interesting, this time about the primacy of accounting over economics:

“It acknowledges and uses the powerful logic that accounting is not just a rear view measurement device – it is also a constraint on all forward looking projections of economic outcomes – meaning that it is an important condition in the substance and shape of good economic analysis.”

With this in mind, we need to remember that today was the future from the point of view of yesterday. Today is a realization of one of the possibilities from yesterday, and not everything was possible to happen today due to accounting constraints.

This is one of the reasons why we pound the table the accounting. The accounting is a constraint on the possible, and excludes some outcomes from ever happening. Not only that, but what happens today *MUST* have been possible in the accounting yesterday – and we *MUST* be able to track this back and see how it happened/evolved in the accounting.

We were talking about endogenous vs. exogenous money recently and some people think money is “long term exogenous”. But we know today is the “long run” from the point of view of 2008, or 1995, or some other date in the past you might choose to make it “long run”. If you think the long run is “5 years in the future”, then what happened 5 years in the past would be manifested today.

So you would find money is long run exogenous by empirically looking at the accounting of today, and relating it to some measured accounting number in the past, and then we would have “long run” exogenous money.

We would be able to see this exogenous money today. We would be able to see how the fed hit their past exogenous money target through measurements we take today based on the actions the fed took in the past and how the accounting evolved. Yet we do not see this in anything we can measure.

Cullen had good thoughts on this too.


Our economic outcome we experience today was one of the possible outcomes we had yesterday. Our outcome today was constrained by what was possible in accounting terms yesterday.



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13 Comments on "Money is Endogenous: Today is Yesterdays Long Run"

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Ramanan, the fake people issue in india sounds a nightmare. Would it be possible to have something like the mpesa system in Kenya to allow the central government to directly electronically give money to each person? India manages to have elections so clearly some nation wide programs are manageable.


I am clueless about what is happening in that post.


It’s a bit roundabout in my view, but that post is not alone.

There’s a lot of unpacking that needs to be done with respect to certain proposals that incorporate a compression of many different policy characteristics.

A big example is the original MM template for NGDP targeting – which conflates the idea of NGDP targeting with using what amounts to QE in order to get to target.

Then there’s the issue of NGDP targeting in and of itself – where the question I’ve tried to pose all along is that NDGP IMO is a much better input for monetary policy guidance than the primary “target” for policy. There are huge questions of tactical feasibility for such a raw “target” approach. There’s been no discussion of this whatsoever that I’ve noticed.

And then there’s the famous debate about the effectiveness of the idea of a futures market for NGDP related instruments – which Mike is very familiar with.

Then there’s the whacky idea of negative interest on reserves.

Then there’s the idea of a helicopter drop, and all the confusion around whether it might be monetary or fiscal, and the persistent annoyance of a term that is so poorly defined and is really a very silly metaphor.

And on and on and on. And the discussion goes round and round and round.


Yes I generally know the MM idea but I am highly confused about what SRW is saying especially post the post-update.

Slightly unrelated to basic points: Beckworth talks of corruption etc when discussing fiscal policy and instead talks of directly handling money to households. In India this is a major issue. When the government wants to give money to the poor in whatever way – “cash transfers”, direct employment (NREGA) or aid after natural disasters etc or some indirect ways such as subsidies or loan relief to farmers, there are these fake humans created who get all the money which gets eaten by politicians. If the Indian government were to make a plan to give free money to households, only a few percent of that will reach them.

Just random info, no criticism of anybody.


Does the extent to which money is partly exogenous over the long run depend on the extent of capture of the state by the banking system / FIRE sector? Imagine if banks and “monied interests” didn’t have the political influence they have and so in 2008 the government had taken the view that they would limit any bail out to keeping the payment system working. Then perhaps 90% of the financial system would have been waved goodbye (good riddance) as with Lehmans. Consequently tens of trillions of dollars of broad money and longer term debt would have been written down. Outside money and treasury debt together with real economy productive capacity and real economy wage contracts would then have been the floor for setting the price level for goods, services and assets. The endogenous ballooning of broad money since 1980 driven by asset price inflation and financialization might have been reset back to a trend more in line with wages and increases in real economy productive capacity. Perhaps the extent of such a reset would have been limited by the amount of risk free treasury debt and outside money (net financial assets in MMT jargon) and we wouldn’t be saying that money was totally endogenous?

Nick Edmonds

Although I’m also of the view that money is best thought of as endogenous (short term and long term), I don’t think it’s really an accounting question.

I can see how it is possible to think of variables as endogenous in the short term but exogenous in the long term. Government spending has an endogenous element, largely because of benefit payments that will depend on income and employment. However, this would not stop the government adopting a policy of adjusting core expenditure over the medium term to bring total expenditure in line with target.

If such a policy were to be implemented, expenditure would still be endogenous in any given period, whether that’s now or a period in twenty years time. However, if you were to measure average expenditure over the twenty years, you would find that it was generally closer to the target than in any particular year. The longer the period you analysed, the closer the average would be to target.

In that situation, I’d say it was reasonable to claim that expenditure was exogenous in the long term, but endogenous in the short term.

In fact, I think that things tend to be more endogenous in the long term than the short term, but I think this is a behaviour issue and has nothing to do with accounting.


Another dose of Paul Davidson then…
“To replace classical theory Keynes provided a general theory which explains the operations of a monetary economy where entrepreneurs enter into nominal contracts in order to organize production and exchange activities. [In mainstream macroeconomics, contracts are always made in real terms as no agent is suffering from “the money illusion.] The sanctity of money contracts is the essence of the capitalist system in Keynes’s GENERAL THEORY. This is an economy where money is never neutral – not in the short run nor in the long run, nor even if money wages and prices are either completely flexible or completely fixed by monetary forward contracts.”

Cullen Roche

The long-run is just a series of short-runs.


All I have to say is, Paul Davidson. OK, I’ll unpack that… contra Mankiw, Keynes would have gotten to it before HIS 6th edition.

That is why in Keynes’s finance motive articles in the [1937 Economic Journal articles] are so important. In these articles, Keynes emphasizes an overdraft system (i.e., endogenous money) and the demand for finance — and indicates that he should “not have overlooked” this in the [General Theory]. Clearly if he wrote a second edition of the GT the finance motive and endogenous money would have been more center stage.

I found that the finance motive articles in the 1937 EJ was the Rosetta
Stone (for me) in unlocking the mysteries of liquidity preference theory
and Keynes’s general theory. I wrote an paper on the finance motive in 1963
and when Sir Roy Harrod (Keynes’s first biographer) saw it when we were
colleagues at the University of Pennsylvania in 1964, he said that this is
exactly what Keynes meant — Then Roy had the article published in the