Endogenous or exogenous money?
While the debate on central bank monetary policy, banks and private debt (see here, here, here, here, and here) seems to have devolved into something unproductive, I have hopes that something more productive can be salvaged. These are important issues that people want to have a better understanding of. After all, we are in the middle of the worst economic calamity in most of our lifetimes. It makes sense that economists would try to gain a ‘collective’ understanding and delineate where their views diverge.
So I want to ask the real question here: is money endogenous or exogenous.
Here’s a good summation of the outstanding issues so far (and forgive me if this post is ridiculously wonkish):
- Do banks create money and do banks require reserves before they make a loan? Does it matter?
- If you are going to model an economy, do you need banks in that model; if so, is money an endogenous/dependent variable or not? Why?
- What can central banks control absolutely and what can they just influence? Base money stock? Credit outstanding? Overnight interest rates? Longer-term interest rates? Why?
- Why are most central banks now price setters instead of quantity setters i.e. rate targeters and not reserve targeters?
From what I have read, there are differeing views on most of these points. But here’s what I am seeing as the big sticking point:
I think the real difference between what Nick Rowe is saying and what people like Scott Fullwiler and Steve Keen are saying is that Nick believes over the medium-term, central bank interest rate policy is endogenous. What I think Nick means is that Scott Fullwiler’s view is reasonably clear and straightforward in his view that central monetary policy is exogenous but that it only matters over a short-term time horizon because central bank interest rate policy adjusts endogenously over the medium-term to commercial bank and other economic variables such that it is really endogenous rather than exogenous.
Further, I think Nick Rowe is saying that it creates an expectation of central bank interest rate policy merely by announcing its target rate and the market moves to accommodate that target, knowing the central bank is the monopoly supplier of reserves. In that sense the central bank has control. But what he seems to suggest is that the central bank policy rate cannot be determined independent of macroeconomic variables (like inflation specifically) and that central bank may be forced to change policy based on these, making it possible to treat the central bank policy rate as medium-term endogenous.
P.S. – Yes I have an opinion and no I don’t agree with some of the things people have been saying in this debate. But the point is not to nitpick but to come to a better understand about how the world works using economics and that’s what I’d like to see. The goal should be to keep this civil, above board and illuminating. Am I being too optimistic again?