In the second video, Keen refers to the empirical work of Finn E. Kydland and Edward C. Prescott (1990) on money supply and the trade cycle, which supports the Post Keynesian theory of endogenous money. Some interesting facts:
(1) M1 and M0 (the monetary base) do not lead the business cycle: they both lag it.These data do not support the orthodox theory of exogenous money or even the orthodox explanation of inflation via the quantity theory of money. Instead, they confirm the Post Keynesian endogenous money theory (Palley 2002; Moore 1988), and the view that credit dynamics are a major cause of business cycles, as argued in Hyman Minsky’s financial instability hypothesis.
(2) M2 – M1 represents credit money. This leads the cycle. That is, changes in credit money precede the cycle.
(3) The velocity of money is quite volatile. It is not essentially stable, as assumed and required by the quantity theory of money.
The direction of causation to explain inflation as postulated in the quantity theory of money is in reality reversed: it is not growth in the money supply causing inflation and wage rises, but wage rises and rises in factor input costs financed by business credit/debt from banks that cause money supply growth.
BIBLIOGRAPHY
Kydland, F. E. and E. C. Prescott. 1990. “Business Cycles: Real Facts and a Monetary Myth,” Federal Reserve Bank of Minneapolis Quarterly Review 14.2: 3-18.
Moore, B. J. 1988. Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, Cambridge and New York.
Palley, T. I., 2002, “Endogenous Money: What It is and Why It Matters,” Metroeconomica 53: 152–180.
