I think the whole idea of endogenous money is vastly overrated and the idea of exogenous money is vastly underrated.
If you want to say central banks care about interest rates, I'm fine with that. If you want to say that interest rates impact aggregate demand and that influences the broader definitions of the money supply, I'm fine with that. But monetary policy is still done by buying and selling high powered money (as far as I know - I've never talked to someone at the OMO desk), and it's done that way because while causality could run both ways (think of the old use of the discount window or Bagehot's dictums as an example of interest rates "causing" money creation), that's not how it works. Of course there is some target interest rate in mind (and THAT is only what gets churned out of some target inflation rate) - but you buy and sell stuff at the OMO desk because it causes that target interest rate to come to fruition.My initial response in the comments was that:
Endogenous money is typically about much more than the manner by which central banks perform OMOs. You are correct that central banks typically buy and sell high-powered("outside") money to target a federal funds rate. However, a theory of endogenous money would argue that does little to control the inflation rate or aggregate demand within the economy. Instead, private banks create "inside" money (deposits) through lending that adds to aggregate demand and can create inflation. After lending, banks ensure they meet reserve requirements and the Fed ensures the entire banking system has enough reserves to maintain its target interest rate.
From this perspective, a money multiplier with respect to OMOs does not exist. Further, money and money-like instruments can be perceived as non-neutral, even in the long run. In these ways and more, the distinction between the two theories is far greater than you appear to let on.
(Note: Through QE, the Fed has been buying Treasuries and Agency-MBS, which are not forms of high-powered money)Since then we have been engaged in some good dialogue back and forth about the merits and actual theory of endogenous versus exogenous money.
Separately, Jonathan Finegold has “a few quibbles” with Edward Harrison’s post on “Endogenous Money and Fully Reserved Banking”:
Second, Harrison writes that bank reserves are irrelevant, because credit demand is endogenously determined; this is true, but generally since demand for credit is practically limitless, reserves provide banks with the capital to lend. I don’t find it convincing to interpret the causality from loan origination to reserve provision (that is, banks lend and then the central banks provides the necessary reserves).To which I responded:
As for the second point, the central bank always provides enough reserves (either through OMOs or the discount window) for the entire banking system to meet its requirements. Banks can also borrow/lend reserves to each other through the inter-bank market. Since the discount window entails an excess fee for banks, it marks the known upper bound at which reserves can always be obtained. Under normal, pre-2008, circumstances the Fed would adjust the total number of reserves in the banking system through OMOs to ensure it met its target interest rate. Now that the banking system has substantial excess reserves, the Fed uses IOER policy to set the interest rate and adjusts the amount of reserves to increase liquidity, shorten asset maturities in the private sector and alter expectations.The theory of endogenous money is a significant departure from exogenous money and mainstream, neoclassical views. This fact makes its acceptance and understanding by people well-versed in the traditional view all the more difficult. Hopefully others will join in the conversations and help turn the tide!
Understanding The Modern Monetary System @ Monetary Realism
Endogenous Money: What it is and Why it Matters by Thomas Palley
Endogenous money - Wikipedia, the free encyclopedia
Fullwiler - "The main shortcoming of the money multiplier paradigm"
A Stinging Critique of Monetarism
The Money Multiplier Fairy Tale