Pushing on a String: Introduction to the Horizontalist-Structuralist debate in Post-Keynesian monetary theory

Monetary policy has become a defining feature of the contemporary economic landscape in light of recent efforts to boost aggregate demand and inflation following the GFC. This paper situates this discussion in a broader context, by revisiting a long-standing debate in Post-Keynesian monetary theory concerning the nexus between central bank conduct and the money supply. Neoclassical monetary theory dictates that the creation of checkable deposits is constrained by the quantity of high-powered money (i.e. currency and reserves, also called the money base) created by central banks. If there exists a reserve ratio, defined as a specified quantity of high-powered money that must be withheld (as a percentage of total deposits), then it follows base money is exogenous, because the central bank arbitrarily constrains money creation in a fractional-reserve lending system courtesy of the money multiplier. The Post-Keynesian literature (Lavoie 2009; Chick 1992; Moore 1991; Fontana 2003) conceives of a theory inimical to this monetarist interpretation of broad money. The analytical currents which animated this turnaround in economic thinking include, in stylised terms, overdraft financial systems, zero-reserve requirement interbank markets, inelastic commercial credit supply and elastic liquidity preference.

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