Steve Keen’s Aggregate Demand, Endogenous Money and Thomas Palley

After “beating up” Paul Krugman about the role of banks in an economy and the need to apply endogenous Money in any macroeconomic model, Steve Keen wrote some papers where he would develop his idea.

The basic idea of those papers were that Agreggate Demand in period 1 will be equal to the income (GDP) of the previous year plus the change in debt.

After reading those papers, I thought “This is awesome!”, but then I read Tom Palleys’s critique and realized Keen was wrong.

Palley rejected the “monetarist” idea of the Money velocity and argued that GDP would suffer from diferente “keynesian” leakages that wouldn’t lead to Keen’s identity.

But I guess, we can all be friends again.

Just some basic facts.

GDP and Aggregate Demand are flows (annual flows normally)

The Money stock and Debt are stocks.

And I guess we should only compare flows with flows and stocks with stocks (that’s another reason the Money velocity is…well nevermind)

So…Instead of Keen’s equation, we should have that the Money Stock in period 1 is equal to the Money Stock in period 0 plus the change in debt (private and public).

I guess this would be right. (but only if you take into account the whole world)

But as we normally want to analyse a country individually we should also use the variation in foreign debt. Right? (I guess so)

After that, if you want to compute the velocity of Money or other shananigans you would only need to divide anual nominal GDP by the Money Stock (but why would you do that?)

But in the end of the day…I guess this was all in Keen’s model, as you can see in the next picture.

money-debt

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