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macroeconomics
At other times, money could be considered endogenous if a
policy rule is established. In this last case, the maintenance of a constant growth in
money supply could be interpreted as the result of a behavioral relationship.
Friedman (1956) uses to call this relationship “institutional conditions.” In this way,
Hall and Taylor share the Friedman point of view regarding the fixed growth rate
rule. That is to say, money supply increases are assumed to be endogenous.
In contrast to the money supply endogeneity above beholding, Tobin (1970) had
the contemporary acumen to note that output might be causing changes in the
money supply. Therefore, output is the control variable and not the money. As a
logical result, the so called reverse causation argument was put forward.
Therefore, money would confirm itself as a variable responding to output
variations, leaving little scope for monetary policy to operate efficiently.
3. Noting possible neoclassical misperceptions
One specification of the above mentioned Lucas scheme (1972), is in what follows
while referring to an specific scenario. The scenario itself has rational agents
receiving inadequate information regarding market prices. That is to say, these
rational agents do not distinguish between real and monetary shocks. As a result,
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“Treating policy variables as exogenous has long been a tradition in
macroeconomics. But more recently an alternative view, that they should be
treated as endogenous, is becoming more attractive. Endogenous policy is
determined according to some behavioral relationship, or what is called a
policy
rule
. The most frequently discussed policy rule in macroeconomics is the fixed
growth rate rule for the money supply that Milton Friedman and other monetarists
have advocated. A fixed growth rate rule is simply to keep the growth rate of the
money supply constant. But this is a very special rule in that it involves no
response of the money supply to economic events.” Hall & Taylor (1988).
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However, it is beyond the scope of this paper to tackle this question.