The Role of credit in a Keynesian monetary economy

Abstract

This paper describes the features of a monetary economy on the basis of Keynes's distinction between a real exchange economy and a monetary economy. In The General Theory, Keynes identifies the reasons for the non-neutrality of money by highlighting the store of wealth function of money; this approach has been adopted by most Keynesian economists. The aim of this paper is to show that such an approach only partially explains the reasons for money non-neutrality and that important elements which demonstrate the relevance of monetary variables emerge when the means of payment function of money is considered. Investigating the role of this function requires that we deal explicitly with how spending decisions are financed. The paper argues that the market for credit must be considered separately from the market for money, and that a viable credit theory can be built from Keynes's post-General Theory writings.     

On the monetary nature of the interest rate in a Keynes–Schumpeter perspective

Abstract

Keynes, in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this article is twofold. The first objective is to point out the limits of the liquidity preference theory. The fundamental limitation of this theory is that it does not allow to realize the intent declared by Keynes in 1933 to elaborate a monetary theory of production The second objective is to present a more solid theory of the monetary nature of the interest rate. It will be shown that an essential element of this explanation is Schumpeter’s analysis of the role of bank money in a capitalist economy. In fact, this analysis represents a fundamental tool to explain the characteristics that, according to Keynes, distinguish a monetary economy from a real-exchange economy     

Money Creation in the Eurozone: An Empirical Assessment of the Endogenous and the Exogenous Money Theories

ABSTRACT

The aim of this paper is to strengthen our understanding of the money creation process in the Eurozone for 1999–2016 period, through an empirical assessment of two main monetary theories, namely the (Post Keynesian) endogenous money theory and the (Monetarist) exogenous money theory. By applying a VAR and VECM methodology, we analyse the causal relationship among monetary reserves (or monetary base), bank deposits and bank loans. Our empirical analysis supports several propositions of the Post Keynesian endogenous money theory since (i) bank loans determine bank deposits, and (ii) bank deposits in turn determine monetary reserves.     

Circular reasoning. Forbonnais and the intricate history of circular flow analysis in the 1750s

Abstract

Circular flow analysis in mid-18th century France is normally associated with the writings of François Quesnay. From the early 1750?s, however, François Véron de Forbonnais developed a distinct theory of circulation in then well-known contributions to the Encyclopédie and his Elémens du commerce of 1754. This article argues that like Quesnay, Forbonnais was in part inspired by Cantillon’s Essay on the Nature of Trade in General. But while Quesnay gave original developments to the real aspects of Cantillon’’s analysis of circulation, Forbonnais focussed on developing monetary aspects, including arguments for the ‘non-neutrality’ of money and an original theory of the money interest rate.     

Money creation and credit multipliers ∗

The standard objections against the quantity theory of money, based on the instability of the velocity of money, are insufficient to discard this long-held monetary theory. The principal criticism of the theory rests on the determination of the money supply. The supply of money is a dependent variable, not an independent one. The demand for credit determines the quantity of money, or at the very least bankers and borrowers share the responsibility. Causality is thus reversed. It is necessary to abandon the concept of money multipliers, which are relics of the quantity theory of money. Bankers can, if they so desirerespond without limitto demands for credit. They are not tied by a fixed amount of pre-existing assets. The goal of the article is to outline an explanation of these statements and provide a vision of monetary theory that is different from that usually taught.     

Disequilibrium as the origin,originality, and challenges of Clower's microfoundations of monetary theory

Abstract

Robert W. Clower's article “A Reconsideration of the Microfoundations of Monetary Theory” (1967) deeply influenced the course of modern monetary economics. On the one hand, it questioned Don Patinkin's (1956) project to integrate monetary and Walrasian value theory. On the other hand, it was the fountainhead of the cash-in-advance models à la Robert J. Lucas (1980), one of the most widely used approaches to monetary theory since the 1980s. Despite this influence, Clower's project to integrate monetary and value theory remains an enigma. My paper intends to resolve it. This is a difficult task since Clower never completed the monetary theory outlined in his 1967 article. To overcome this difficulty, I characterise the intellectual context from which Clower's contribution emerged and have recourse to a reconstruction of his project. This reconstruction is based on the analysis of published and unpublished materials, written by Clower before and after the 1967 article. It is argued that Clower sought to elaborate a disequilibrium monetary theory whilst retaining the two pillars of Patinkin's integration, i.e., the introduction of money into utility functions and the real-balance effect. I trace the origins, account for the originality, and discuss the challenges of this project.     

James Steuart and the making of Karl Marx’s monetary thought

Abstract

This paper analyses the influence of James Steuart on Karl Marx’s monetary thought. It deals more specifically with Marx’s rejection of an automatic mechanism that links variations in the quantity of money to their direct impact on prices. Steuart’s pioneering discoveries in economics inaugurate an anti-quantity theory tradition that Marx supported and which fed his own conception of money and credit. Here, we deal with the criticism of the assumptions of the quantity theory of money (QTM), the specifically social character of labour which creates exchange value, the distinction between the functions of money, the difference between income spending and capital advances, and the difference between simple circulation and reflux of money credit.     

On Realizing Profits in Money

A basic if neglected step in monetary theory is to show that a given amount of money will enable all transactions to take place in money. But if the money advanced is no more than current costs, how are profits to be realized in money? The answer requires tracing the pattern of circulation, which, in turn depends on the structure of production and distribution. The sectors have different patterns of interdependence, so imply different sequences of transactions. Borrowing is costly, so the amount of money must be minimized. These issues have been brought into focus in the interesting article of J-F Renaud.     

Why Marx Neither Has Nor Needs a Commodity Theory of Money

This paper argues, contrary to the standard interpretation, that money in Marx's theory is tied neither to bullion nor to any commodity basis. It is rather the sole social form of value autonomous from use-value. This is demonstrated by reference to Marx's account of the social functions of money, and by showing that to subsume 'money' under 'commodity' commits a category mistake within Marx's system. My argument is conceptual rather than historical. It seeks to locate, not to deny, the role of 'gold' in Marx's monetary theory. It has relevance to contemporary debates about the need for some new 'gold-standard' to sustain the international monetary system.     

Central Banking and Post-Keynesian Economics

Abstract

The Post-Keynesian theory of endogenous money has given much attention to the role of the central bank in the money creation process. Circuit theory has neglected this role, in so far as it has focused on the relationship between banks and firms within a monetary production economy. The aim of this paper is therefore twofold. First, it intends to fill this gap in circuit theory, by providing a role for the central bank in settlement of interbank debts. Secondly, it aims at reinforcing the Post-Keynesian analysis of central bank money by considering both the money-purveying and the credit-purveying roles of the settlement institution in the interbank market. The result of this analysis is a more comprehensive theory of endogenous money, where the lender-of-last-resort facilities of a central bank are viewed as an endogenous phenomenon involving both a money creation and a credit operation between the central bank and the domestic banking system. In such a framework, monetary policy consists of setting the base rate of interest at a level that enables banks to limit their bilateral debt position in the interbank market, so as not to disrupt the workings of the payment system by either an illiquidity or an insolvency crisis.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Money as a Generic Particular: Marx and Simmel on the Structure of Monetary Denominations

ABSTRACT

This article is concerned with the structure of monetary denominations of economic value. Marx and Simmel analyze this structure by means of references to objects of mere catallactic validity. These objects are ontologically atypical insofar as they are particulars of the genus commodity. Understanding money through generic particulars elucidates the conceptual link between money as a unit of account and money as a means of payment. This initially perplexing idea captures a fundamental characteristic of money without committing to either a commodity theory or a claim theory of money. A modification of the notion ‘commodity’ allows for a conception of money as a generic particular that is consistent with contemporary accounts of money as abstract purchasing power residing in different forms of liabilities and claims denominated in a common quantitative scale.     

Pigou on business cycles and unemployment: an anti-gold-standard view

Abstract

This note examines A. C. Pigou's views on the practical issue of high unemployment in the 1920s. In his Industrial Fluctuations, Pigou emphasized that the monetary aspect of business cycles was much more important to fluctuations in unemployment than wage adjustment. In a journal article, however, he stated that major part of the high unemployment should be attributed to the failure of money wage adjustment. I argue that, on balance, Pigou attached greater importance to monetary problems than to the wage rigidity.     

How justified is abandoning money in the conduct of monetary policy in Australia on the grounds of instability in the money‐demand function?

The role of money in the design and conduct of monetary policy has reemerged as an important issue in both advanced and developing economies, especially since the 2007 global financial crisis. A growing body of recent literature suggests that the causal relationship between money supply growth and inflation remains intact across countries and over time and that this relation is not conditional on the stability of the money‐demand function or whether money is endogenous or exogenous. Moreover, critical for a rule‐based monetary policy is the presence of a long‐run stable money‐demand function, rather than a short‐run money‐demand model that may exhibit instability for many reasons, including problems with estimating a money‐demand model with high‐frequency data. Provided that a stable money‐demand function exists, it could be useful to establish long‐run equilibrium relations among money, output, prices, and exchange rates, as the classical monetary theory suggests. Within this analytical framework, this paper addresses the question of whether money has any role in the conduct of monetary policy in Australia. The conventional wisdom is that the money‐demand function in Australia has been unstable since the mid‐1980s due to financial deregulation and reforms; this led to a change in the strategy of monetary policy for price stability in the form of inflation targeting that ignores money insofar as inflation and its control are concerned. This paper reports empirical findings for Australia, obtained from a longer quarterly data series over the period 1960Q1–2015Q1, which suggest that instability in the narrow‐money‐demand function in Australia was primarily due to the exclusion of variables which have become important in the deregulated environment since the 1980s. These findings are confirmed by an expanded form of the narrow‐money‐demand function that was found stable over the past two decades, although it experienced multiple structural breaks over the study period. The paper draws the conclusion that abandoning the monetary aggregate as an instrument of monetary policy in Australia, under a rule‐based monetary policy such as inflation targeting, cannot be justified by instability in the money‐demand function or even by lack of a causal link between money supply growth and inflation.     

Fiscal dependence on trade taxes and the level of economic development:: a comment

We test for fractional dynamics in US monetary series, their various formulations and components, and velocity series. Using the spectral regression method, we find evidence of a fractional exponent in the differencing process of the monetary series (both simple-sum and Divisia indices), in their components (with the exception of demand deposits, savings deposits, overnight repurchase agreements, and term repurchase agreements), and the monetary base and money multipliers. No evidence of fractional behaviour is found in the velocity series. Granger's (Journal of Econometrics, 25, 1980) aggregation hypothesis is evaluated and implications of the presence of fractional monetary dynamics are drawn.     

Of clouds and clocks and Keynes: conceptions of reality and the growth of knowledge function of money ∗

In this paper, John Maynard Keynes' General theoryand the concept of money are given an evolutionary interpretation. This interpretation is based on Karl Popper's delightful essay ‘Of clouds and clocks: an approach to the problem of rationality and the freedom of man’. The essay presents two things: Popper's conception of indeterminism and his general theory of abstractions. Popper's general theory concerns the role of abstractions and rule-governed, hierarchical systems of abstractions in structuring an indeterministic and uncertain world. He applies his general theory to science.Popper maintains that science is an abstract, rule-governed, linguistic process that facilitates criticism as a way of learning about our world. Popper calls this the growth of knowledge function of science. Popper's general theory can be applied to Keynes' General theory. Following Popper, I argue for a conception of the economy as a rule-governed, monetary language of commerce that facilitates critically minded inquiry in the domain of ordinary economic transactions. A monetary system facilitates the growth of commonsense knowledge in the economy. I call this the growth of knowledge function of money. An awareness of indeterminism and a growth of knowledge like function of money seem to pervade Keynes' General theory.     

Cambridge's Contribution to Endogenous Money: Robinson and Kahn on credit and money

It is often claimed by American Post Keynesians that the theories of endogenous money originated in the mid-1950s as a result of articles published by Nicholas Kaldor and Hyman Minsky. This paper offers another possibility. It argues that, in the mid-1950s, both Joan Robinson and Richard Kahn offered insights into the workings of a credit economy that have been largely ignored by Post Keynesians and that are consistent with Post Keynesian monetary theory.     

Carl Menger and the network theory of money

Carl Menger has occasionally been cited as a forerunner to the network theory of money. This article analyses Carl Menger's monetary theory and evaluates whether he was aware of the network characteristic of money from a retrospective angle. The result is mixed. Menger is one of the first to discuss the marketability and liquidity of an asset, which in German he denotes Absatzfähigkeit. This concept has a strong connection with the network aspect of a commodity. However, he is not distinct enough in his analysis and there is a lack of depth in his understanding.     

Inside and outside fiat money, gains to trade, and IS-LM

Summary. We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). At the other extreme, if the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual. Received: January 2, 2002; revised version: April 8, 2002 Correspondence to: P. Dubey