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« Stiglitz on Homoeconomicus | Main | Debate Over Soviet Economic Growth »


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"it’s a language, a means of communication, a way of transmitting information about the economy and economic opportunities"
I'm reminded of Narayana Kocherlakota's argument that "money is memory":

That paper isn't very good, it doesn't really deal with the arguments.

I think the best way to discuss it these days is to draw an analogy with broadband suppliers. I wrote this on a Money Illusion discussion a while ago...

The situation here is quite easy to understand. The Federal reserve is the maker of a fairly centralized market. In that role it automatically supplies reserves.

This line of credit is similar to that which I have with my bank, or with my electricity or telecoms supplier. The business relationship between the parties is also quite similar. There are short term and long term elements to it. In the short term the Fed must provide funds, however, in the long term the Fed retain several ways of fining banks that demand too much. There is the penalty rate, for example.

Ceteris paribus the Fed can control high-powered money. That is, suppose the commercial banks are in a particular set of long-term situations. The Fed then buys a large quantity of treasury bonds. The consequences of this are be obvious.

(The question of whether the term “high-powered money” is very useful or if the multiplier model does what some say it does is separate).

However if the longer-term aspects of the relationship change at the same time as the bond purchase then that will clearly have an effect. Of course it’s also possible that a short-term change will create longer term complications. Banks may go bankrupt because of large changes in the interest rate.

The same sort of situation occurs in the telecoms and electricity industries. For example, think about those internet suppliers who offer “unlimited broadband”. Most of these “unlimited” contracts have “abuse” clauses that allow the company to cut off user who download too much. So, although technically speaking the users of the broadband can use as much as they like, in practice things are different. If you use too much first you get a snotty letter. Then if you continue a month or so later you get thrown off. Broadband supplier shape demand by changing prices to new customers and by the threshold that triggers the snotty letter.

Steve: It's a mistake, I think, to treat "endogenous" as a synonym for "determined by the state of real demand for money." The latter is a special case only. Any money supply process that is at all systematic is also in some sense endogenous, including one overseen by a rule-following central bank.

This, at least, is how most economists will understand the matter. Post-Keynesians admittedly use "endogenous" in the special sense mentioned above, and allowing for that your reply to their arguments is correct.


I'm not sure I ever used the word "endogenous" to describe how money would be supplied under free banking. I think that's Flanders' reading of my book rather than my own terminology. If I *did* use that term, it was not systematically to my knowledge.

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