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The Exogenous Money Supply Assumption in Monetary Theory and Policy

Dow S (1997) The Exogenous Money Supply Assumption in Monetary Theory and Policy, Archives of Economic History, 8 (1-2), pp. 7-36.

First paragraph: It is conventional in macroeconomic theory to assume that the domestic supply of money is exogenous. When this assuption is incorporated within general equilibrium models, the money supply becomes exogenous not only in the theoretical sense but also in the causal sense; it is only changes in exogenous variables which can cause motion. But much of the applied monetary literature casts doubt on the realism of the theoretical assumption: either the monetary authorities choose to let the private sector determine the money supply or, more strongly, they are unable to prevent the private sector from doing so. These arguments are independent of the possibility of money supply changes induced by international capital flows. The implication is that the money supply is not exogenous in the control sense. Finally, although the concept of exogeneity has undergone refinement in the econometrics literature, the statistical realism of the money supply exogeneity assumption in macroeconomic theory has not been categorically established, far less its causal role.

AuthorsDow Sheila
Publication date12/1997
PublisherArchives of Economic History
ISSN 1108-7005

Archives of Economic History: Volume 8, Issue 1-2

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