Three essays on endogenous money

This dissertation comprises three essays on the topic of monetary endogeneity. There are three relevant definitions of monetary endogeneity. They claim, respectively, (1) that the monetary authorities are unable to control the quantity of money in circulation; (2) that the supply curve of money is horizontal, or at least non-vertical; (3) that the supply of money is (proximately) determined by profit-seeking activity; and (4) that output, prices, and perhaps other private sector variables, drive the money supply, rather than vice-versa. These definitions are related, but not identical. Essay One describes and analyzes two recent developments in the long history of economic theorizing about the endogeneity of the supply of money: debates on the subject between the two main post-Keynesian schools of thought—the structuralists/Minskians and the horizontalists—and the recent adoption by real business cycle theorists of a much different version of endogeneity. The essay demonstrates that the theories of the structuralists and Minskians are the soundest of the three, principally because they are well supported by empirical and institutional evidence. Essay Two develops a simple dynamic model, in which version 2 of endogeneity is assumed. It is then that, depending on the values of certain paremeters, version 1 may or may not hold. Essay Three examines two sorts of empirical evidence on the endogeneity of money. The first type of evidence is a series of case studies of episodes when various central banks in the developed world have attempted to target the money supply. Clearly, if these efforts were largely successful, then version 1 of endogeneity would be cast into doubt. The conclusion of this series of case studies is that there are no known cases of successful targeting over the short term. But several countries—including Switzerland and Germany—have been able to meet yearly targets in most years. Other countries, such as Britain, have had little success with monetary targeting. The case studies are thus weakly supportive of endogeneity, type 1. The second type of empirical evidence—vector autoregression studies-are generally consistent with type 2 endogeneity.