Final answer:
Money supply endogeneity refers to the determinants of the money supply within the financial system, while financial instability refers to the vulnerability of the financial system to crises. Meghnad Desai, Minsky, and Pollin have explored these concepts in their works.
Step-by-step explanation:
Money supply endogeneity refers to the idea that the money supply is determined endogenously within the financial system. This means that the amount of money in circulation is not solely determined by the actions of the central bank, but is also influenced by the lending and borrowing activities of banks and other financial institutions. Meghnad Desai explains this concept in his work on endogenous and exogenous money.
Financial instability, on the other hand, refers to the vulnerability of the financial system to crises and disruptions. Hyman Minsky's work in 1957 explores the idea that stability can lead to instability in financial markets. He argues that prolonged periods of stability can encourage risk-taking behavior and the buildup of unsustainable levels of debt, ultimately leading to financial crises.
In 1991, Robert Pollin further explored the concept of financial instability, emphasizing the role of financial institutions and their behavior in driving economic fluctuations and crises.
Money supply endogeneity implies that the money supply is determined by the banking system rather than the central bank, while financial instability, as described by Minsky, is an inherent trait of the financial system that can lead to crises. These concepts are pivotal in Keynesian and neoclassical macroeconomic analysis and macroeconomic policies such as monetary policy and fiscal policy, which aim to achieve economic growth, low unemployment, and low inflation.
The concepts of money supply endogeneity and financial instability are central to advanced macroeconomic analysis and understanding the interactions between monetary policy and the banking system. Endogeneity of the money supply, as discussed by Meghnad Desai, refers to the idea that the supply of money is determined internally by the banking system rather than being exogenously controlled by the central bank. It involves the process through which commercial banks extend credit and create deposits, thus influencing the overall money supply. Hyman Minsky's work, particularly from 1957, emphasizes the inherent instability of the financial system, where periods of economic stability can lead to riskier lending practices and subsequently to financial crises. Robert Pollin's 1991 work further explores these ideas, considering the impact of monetary policy on economic stability.
In the Keynesian and neoclassical frameworks, macroeconomic policies such as monetary policy and fiscal policy play vital roles in achieving economic goals. The banking system's ability to create money, and the policies enacted to regulate this process, are key aspects in both preventing and managing financial instabilities. Money, in modern economies, is fundamentally intertwined with bank accounts and the broader financial system. This understanding is crucial when examining the goals of macroeconomic policy: economic growth, low unemployment, and low inflation.
Money fulfills several functions, acting as a medium of exchange, a unit of account, and a store of value. Commodity money and fiat money are two types of money that can be contrasted; commodity money has intrinsic value, while fiat money is backed by government decree without intrinsic value. These characteristics of money are essential to consider when discussing its role in the economy and its impact on financial stability.