The Money Supply Process: A Historical Reinterpretation

There is currently profound disagreement about the nature of the money supply process.1 The mainstream view, as presented in most textbooks, takes for granted that the money supply should be viewed as under the exogenous control of the monetary authorities, in principle at least, via the base-reserve-multiplier process. The money supply bears an empirically stable relationship to bank reserves and to the base. These magnitudes in turn, which constitute the liabilities of the central bank, are directly controllable by open market operations. The money supply function should therefore be modeled as vertical, or at least sharply upwardsloping, in interest money space. The money supply is an exogenous variable determined by the monetary authorities.