Authors: I. David Wheat
Addresses: University of Bergen, Fosswinkelsgate 6, N-5020 Bergen, Norway
Abstract: This paper is primarily for instructors seeking new ways to teach the endogenous view of money creation, i.e., that money supply responds to the economy's credit demands, in contrast to the textbook money multiplier view that central banks can unilaterally adjust the monetary base to trigger desired changes in the money supply. Our approach helps students visualise endogenous money in a transparent conceptual model, and also learn to use a simulation model that demonstrates endogenous money dynamics. One experiment shows how a bank lending process infused with animal spirits can cause a central bank to lose control of the money supply even while it maintains control of interest rates. The paper has two additional purposes with a broader audience in mind. It proposes a consensus-building definition of endogenous money to mean 'created by an endogenous feedback structure'. And, it demonstrates how system dynamics is used as a method of scientific inquiry as well as a simulation tool.
Keywords: animal spirits; central bank; economics education; endogenous; exogenous; feedback; macroeconomics; model; monetary policy; money; system dynamics.
International Journal of Pluralism and Economics Education, 2017 Vol.8 No.3, pp.219 - 243
Received: 12 Sep 2016
Accepted: 23 May 2017
Published online: 17 Dec 2017 *