Monetary Endogenous Research - A History Of Economic Thought's Point Of View

Endogeneity or exogeneity of money supply is a undecided cutting-edge issue in the field of modern monetary and finance. Studying this problem has a very important theoretical and practical significance to choice of the mode and intermediate target of monetary policy, and it will affect transmission mechanism and effectiveness of monetary policy. The money supply is an important control object of monetary policy in China, but the effect of policy is more and more questioned. Initiative and controllability of money supply is weaker and weaker, the monetary policy operation of Central Bank is more and more difficult. Difficulties and experiences of the monetary policy operation in reality make us began more and more attention to the problem of China’s endogeneity of money supply.Exogenous monetary theory is the common hypothesis of many mainstream parties such as the neo-Keynesians, monetarist school, rational expectations school. They believe that a country’s money supply is an exogenous variable, decided by factors external to the economic process, more directly, independently decided by the monetary authorities, and they believe that we can adjust price levels, interest rates and real output and so on through changing money supply.Endogenous monetary theory is that money supply is determined by various factors in the economy, such as price levels, interest rates and the actual level of output. The endogenous money theory has a long history, from Stuart and Smith in the18th century, Marx and Banking school in the19th century to Wicksell, Keynes in<monetary theory>period, Schumpeter, Radcliffe Committee, Gurley and Shaw, Tobin in the20th century. They developed a series of endogenous monetary theories. Post Keynesian school established a complete theory of endogenous money. They all believed that money is endogenous in the economic system, the monetary authorities can only be adaptable to inject the money into the economy, so the monetary policy of controlling the money supply is not desirable. To look for the root cause of endogenous money, we need to analysis its root-the nature of money. Through studying monetary history, we found that the nature of money is a kind of credit-debit relationship rather than the medium of exchange. In modern financial system, the credit-debt relationship created in economic activities needs to be cleared with bank money which is widely accepted by the public. Therefore, loan creates deposit which meets the demand of clearing between the privates. Furthermore, more authoritative state money is needed for public withdraws and clearings among banks and government, thus the reserves should be provided adaptively by central bank.Therefore, the money supply is determined by the bottom-up endogenous demand, ultimately depends on the credit-debit relationship created by economic entities.The analysis implies that the central bank should abandon quantitative control and shift to interest rates control as the intermediate target, thus the rigid financial monitoring must play the important role in the monetary policy.