Keynes assumed inelasticity of supply (or inelasticity of production) with respect
to demand as a necessary attribute of money. But the post-Keynesian theory of money
suggests that the money supply function should be viewed as horizontal, at a level of interest
rates established by the central bank in setting the supply price of reserves. Interest rates
rather than the money supply are the central bank’s true exogenous control variable. The
money supply is endogenous, credit-driven and demand-determined. This paper examines
why the later theory surpass Keynes’s theory of money.
JEL Classification: E52; E12.
Keywords: Money supply post-Keynesianism