Interest Rates vs. Monetary Aggregates: A (Sort of) Brief History of the Monetary Policy Implementation Debate

As I mentioned in a previous post, I will be doing a series of posts on issues surrounding monetary policy implementation. I already broached the concept of monetary policy implementation vs. strategy, an understanding of which I think is critical for delving deeper into this topic, including what’s contained within this post.

Below, I summarize Bindseil’s account of the history of the debate surrounding the optimal approach to monetary policy implementation. Many of the people and ideas contained within will be familiar to those interested in this topic, but the historical arc along which they appear may be less widely known. Bindseil relies on an extensive set of primary and secondary sources. However, these views are not necessarily unique to Bindseil. I’d imagine Post-Keynesians would give similar accounts, and likely have. I’d also emphasize at the outset that this is a 4 page summary of ~34 pages of Bindseil’s work. Bindseil obviously provides much more argumentation, citation, and quotation than I do here. Moreover, this topic is returned to throughout his ~250 page book.

Ulrich Bindseil: If You’re Interested in Monetary Policy Operations, Get Your Hands on His Book

I plan to do a series of posts covering various aspects of monetary policy operations and theory, including the following topics:

Brief Thoughts on Reconciling Heterodox and Mainstream Macroeconomic Ideas

In my gut, I feel there must be a way to reconcile the mainstream New Keynesian model with the mechanistically accurate way many heterodox economists (mostly thinking of Post-Keynesians here) describe the functioning of the monetary system. There will likely be some irreconcilable gaps, particularly when we start to move away from the monetary system, but it may be possible in a rough sense. I feel this way because most of the time, the two sides can’t even agree on their disagreements (okay, at least the participants on the internet). To me, that’s a sign there’s a serious element of cross-talk whereby each side is speaking a different language.

Why Calling Banks "Financial Intermediaries Between Lenders and Borrowers" Is Okay, Even if You View Banks Through the "Endogenous Money" Lens or Something Similar

Introduction

There have been extensive debates on the econoblogosphere over the past couple of years regarding the degree to which banks are “special” due to the manner in which they create money and credit. Steve Randy Waldman, as is often the case, provides a helpful synthesis, discussion, and collection of links regarding these debates.

As almost always in these sorts of mainstream versus heterodox intellectual scuffles, the extent to which there is disagreement due to differences in framing and semantics, as opposed to the underlying fundamental issues, is unclear. Additionally, there are many elements to this debate, and both sides have valid things to say (disclaimer: I am admittedly amalgamating the debaters into two broad camps for simplicity, but further delineations can be made). However, I do not think that for each and every element of the debate, each side offers an equally valid viewpoint. In any case, my intention here is not to provide a comprehensive analysis of these matters. I recommend reading JKH’s commentary at the following links for more detailed thoughts along these lines.

What I’d like to focus on is the mainstream economist’s tendency to characterize banks as ‘financial intermediaries between borrowers and lenders’ with respect to their lending function. Many participants (but not all!) in this debate that lean towards the economic heterodoxy have a problem with this characterization, given their usually more nuanced understanding of banking operations and mechanics. I understand and sympathize with this perspective, but I ultimately aim to argue what’s stated in the title of this blog post. I think someone with an endogenous view of money can be okay with the mainstream characterization, even if some mainstream economists who use it don’t have a very robust understanding of how banking works operationally.* To be clear up front, none of this is to say that banks are not important to the economy or should not be modeled.