Unobserved Rational Expectations and the German Hyperinflation with Endogenous Money Supply

In this paper, the endogenous money supply hypothesis in Saudi Arabia is examined using data from January 1997 to February 2015. The study uses Johansen cointegration technique and Vector Error Correction models (VECM) for cointegrated series.The long run causality was found to run from bank loans (BL) and from demand deposit (TD) to the money supply (MS1), and not from MS1to BL, as the mainstream view. The endogenios money supply hypothesis is reinforced by the long run causality running from BL to TD. For MS2, the study verifies a long run causality running from BL and TD to MS2. Therefore, the money supply of Saudi Arabia whether using MS1 or MS2 is endogenous in the long run. The result of short run causality with regard of MS1 using Wald Test does not confirm money supply endogeneity in the short run. Short run causality using Granger with regard to MS2 assures short run causality running from TD and BL to MS2. The implication of this work is that Saudi monetary agency can not control the money supply in the long run. It only has some influence on MS1 in the short run.

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The endogenous money supply

Post Keynesian Monetary Economics ◽

10.1007/978-1-349-18229-9_4 ◽

1986 ◽

pp. 62-72

Author(s):

Stephen Rousseas

Keyword(s):

Money Supply ◽

Endogenous Money

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The theory of endogenous money and the LM schedule: prelude to a reconstruction of ISLM

Brazilian Journal of Political Economy ◽

10.1590/0101-31572016v37n01a01 ◽

2017 ◽

Vol 37 (1) ◽

pp. 3-22 ◽

Cited By ~ 2

Author(s):

THOMAS I. PALLEY

Keyword(s):

Interest Rates ◽

Money Supply ◽

Bank Lending ◽

Macroeconomic Theory ◽

Preference Theory ◽

Money Multiplier ◽

Keynesian Theory ◽

Money Economy ◽

Endogenous Money ◽

Money Creation

ABSTRACT Money is at the center of macroeconomics, which makes understanding the money supply central for macroeconomic theory. This paper presents the Post Keynesian theory of endogenous money supply and shows how it is fundamentally different from the conventional money supply theory. The conventional approach relies on the money multiplier and bank lending is invisible. Post Keynesian theory discards the money multiplier and focuses on bank lending which drives money creation. The paper emphasizes the structuralist version of Post Keynesian theory which retains Keynes’ liquidity preference theory of long term interest rates and also recognizes banks are subject to financial constraints that limit their lending activities. The paper then shows how to derive the LM schedule in an endogenous money economy, which is a necessary prelude to reconstructing the ISLM model.

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