PKE Theoretical Aspects of Money and Finance

Abstract

PKE monetary and financial theory has essentially developed around the theme of the endogeneity of money, which is seen as depending minimally on three types of behaviour. These are the behaviour of the central bank, the lending behaviour of the commercial banks, and the borrowing behaviour of the non-bank private sector. Under a fixed exchange rate regime we should also include the overseas sector. As regards domestic sources of endogeneity, the standard argument in PKE is that the central bank, as lender of last resort, has no realistic alternative but to satisfy the needs of trade at the discount rate that it fixes (see for example, Kaldor, 1980; Moore, 1988). Commercial banks then provide credit at the discount rate fixed by the central bank plus a mark-up. The demand for bank lending is interest inelastic. This is the standard argument in some, if not in most, PKE monetary and financial theory.