Post-Keynesian Monetary Theory and the Models of Distribution and Growth

Eckhard Hein

Chapter 9 in Money, Distribution Conflict and Capital Accumulation, 2008, pp 63-67 from Palgrave Macmillan

Abstract: Abstract As early as the 1950s, Joan Robinson developed major elements of Post-Keynesian monetary theory (Lavoie 1999; Rochon 2001b; Vernengo/Rochon 2001). In her analysis of a monetary circuit Robinson (1956, pp. 225–44) shows that money supply of banks adjusts flexibly to money demand, mainly determined by production and investment decisions of firms and payment conventions, by means of credit generation and repayment. The banking sector does not directly control the quantities of credit or money, but has control only over the interest rate and can use this rate to influence credit and money demand. The rate of interest is determined by production costs in the banking sector and by the degree of competition in this sector. The rate of interest is hence treated as an exogenous variable for production and accumulation, whereas the volume of credit and the quantity of money are endogenous variables. Investment is not limited by previous saving, but investment can be financed by means of credit creation at a given rate of interest. Firms’ investment decisions are affected by expected profits, and banks’ decisions to finance depend on creditworthiness of prospective debtors. The latter is affected by the degree of indebtedness, because liabilities — together with the rate of interest — determine the part of profits which is to be distributed to existing creditors and which is therefore not available to pay for further credit.

Keywords: Interest Rate; Capital Accumulation; Money Supply; Banking Sector; Expected Profit (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1057/9780230595606_9

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