Post Keynesian monetary theory : an empirical investigation

For many years textbook economic theory has proceeded on the basis that the supply is exogenous. It is assumed that central banks, by changing the base, alter the supply to whatever level is desired. The post Keynesian school argues that this view is unrealistic and in practice the base is endogenous to some extent. The purpose of this study was to determine whether post Keynesian monetary theory is supported by recent Australian data. This thesis examines the causal relationship between the base, the supply and bank lending in Australia over the period 1980(1) to 1995(3). Causation from the base to the supply to bank lending supports the orthodox money multiplier view, while causation from bank lending to the supply to the base supports the post Keynesian view. Horizontalist post Keynesians take the extreme position that the base is completely endogenous and that causation runs solely from bank lending to the supply to the base. Structuralist post Keynesians argue that the supply can be exogenously changed by a central bank but is also subject to endogenous change. Causation should therefore exist in both directions. The method used in this thesis was to replicate the testing procedures used by Basil Moore, a prominent horizontalist post Keynesian, in relation to Australian data. The results of this study indicate 'bidirection.al causation between the base, the supply and bank lending. This supports the structuralist post Keynesian view and implies that the horizontalist post Keynesian view and the orthodox view can be rejected. The testing procedures are based on Granger causality. This study improves on Moore's method by allowing for cointegration and optimal lag length.