The Exogenous Money Supply Assumption in Monetary Theory and Policy

Citation

Dow S (1997) The Exogenous Money Supply Assumption in Monetary Theory and Policy. Archives of Economic History, 8 (1-2), pp. 7-36. http://archivesofeconomichistory.com/webdata/magaz/062313125608_VolumeVIII_No1-2_1997.pdf

Abstract
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.

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

People

Professor Sheila Dow

Emeritus Professor, Economics