Dear Jim,
Thank-you for your kind words about my book on PK Economics. Some
observations:
(1) Romer's AD schedule is in fact the IS schedule. His model is IS-LM
with a horizontal LM. The monetary authority is just setting the
interest rate - something lots of PKs have maintained for a very long
time.
(2) You are right to observe that in a "static" context, the endogenous
money debate does tend to reduce to a debate over the slope of the LM
curve. Horizontalists/Accommodationists believe that the LM is always
flat. Structuralists believe that the LM is positively sloped, and that
interest rates have a tendency to rise as output rises relative to
normal levels.
There are many reasons for this related to issues of financial
intermediation and changing risk positions. The monetary authority may
also contribute to the extent that it adopts a "leaning against the
wind" policy stance.
(3) Despite this, even a static conception of endogenous money yields
insights and is of value. (i) It firmly introduces credit into the
analysis, thereby leading to a focus on the macroeconomic consequences
of debt. (ii) It discredits monetarist claims about the ability to
control the money supply. The money supply is endogenous and can't be
controlled. The monetary authority can only control the monetary base
and the shortest of short term interest rates. Beyond that, all else is
endogenous. (iii) This recognition of endogeneity then leads to a
concern with optimal regulation - i.e. what are the best structures for
managing it?
(4) But the real pay-off to endogenous money comes when it is located
in a "dynamic" context. I have explored this issue in a business cycle
model [Journal of Economics/ Zeitschrift fur Nationalokonomie, 1997,
vol.65]. The bottom line is endogenous money amplifies the business
cycle.
Unfortunately this work was still in progress when I wrote my book, and
therefore did not get to include it.
Best,
Tom Palley
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 530-898-5321
E-Mail [EMAIL PROTECTED]
