Money supply in the history of macroeconomic thought: 50 shades of endogeneity

Abstract

The paper considers the evolution of the money supply concept in economics through the lens of contemporary discussion on the degree of its endogeneity. It is stated that the model of exogenous money supply formation, widespread in the literature and actively criticized in recent decades, is an artifact of macroeconomic thought. Its dominance lasted a very short time period, and various forms of endogeneity were attributed to money supply much more often in the course of monetary theory development. Authors cover the debates between the currency and banking school in the XIX century, the birth of the theory of money multiplier, Keynes’ position, the monetarist view of money supply and its criticism by Post-Keynesians. Particular attention is paid to the turn in views within the mainstream, from the Real Business Cycles doctrine to state-of-the-art models of the New Synthesis. It is emphasized that the complete exogeneity of money supply is a distinctive feature only of the monetarist approach, which has relied on the specific assumption of the stability of money demand function. The paper shows that, despite the visible convergence between the New Keynesian and Post-Keynesian positions, based on the modeling of interest rate targeting rather than money supply targeting by the central bank, fundamental differences still remain between two camps regarding the endogeneity mechanism.