The money supply in macroeconomics
Howells, P. (2010) The money supply in macroeconomics. In: Galindo-Martin, M. A. and Spiller, C. N. , eds. (2010) Issues in Economic Thought. New York: Nova Science Publishers Inc., pp. 161-184. ISBN 9781608761739
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The notion that the quantity of money in an economy might be endogenously determined has a long history. Even so, it has never been part of mainstream economic thinking which has remained dominated by the view that the policymaker somehow controls the stock of money and that interest rates are market-determined. However, the need to design and operate a monetary policy that works for modern economies as they are currently constructed, has led to the emergence of the so-called ‘new consensus macroeconomics’ in which it is recognised that the policymaker sets a short-term interest rate and the quantities of money and credit are demand-determined. This chapter looks at the way in which this ‘new consensus’ is (at last) forcing a recognition, in the teaching of money, that the money supply is endogenously determined. It also shows how we can take this further by adding a banking sector to a model of the real economy in which the money supply is endogenously determined.
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