Money Supply

Date of Original Version



Book Chapter

Abstract or Description

Conjectures about aggregate effects of intermediation, debt, financial regulation and deregulation are common in economists' discussions. Standard macroeconomic models provide no basis for these discussions. Models in the IS-LM tradition do not distinguish between inside and outside money or, more relevantly for present purposes, money produced by governments and central banks and money produced by intermediaries. These models also fail to recognize the role of credit and the interaction between the credit market and the money market closely associated with the intermediation process. Recent work in the rational expectations tradition typically treats the production of money as a stochastic process; the money stock changes randomly, and the stochastic process is not affected by the institutional structure or by economic processes. Textbooks continue to present the traditional multiple expansion of deposits as an activity separate from macroeconomic analysis; money changes in a deterministic way that is independent of market forces.



Published In

Handbook of Monetary Economics, Vol. 1, (eds.) B.M. Friedman & F.H. Hahn,, 1.