Behavioral Finance Lecture 09: Modeling Endogenous Money

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In this lecture I continue the development of the QED model of a pure credit economy began in the last lecture, including modelling production and developing a pricing equation to produce a combined monetary-physical model. (see NOTE below if you can’t see this video in your browser)

Powerpoint Slides (QED Files Free download; DebtWatch Members: Part 1 Part 2; CfESI members: Part 1 Part 2)

In the second half of the lecture, I use the model developed in the first half to show that money is not neutral in a credit-based economy–a higher rate of money creation results in a fall in unemployment–and also model a credit crunch. I also model two government policies to counter a crunch: giving money to the banks (which Obama did) and giving it to the debtors (which the Australian government did). Conventional money multiplier theory argues that the former is more effective; I show that the latter is about three times better than the former.


It appears that I’ve been uploading these videos in HTML5 format, which isn’t supported on some browsers–specifically Internet Explorer 6-8! Fortunately there is a workaround for this: installing Google Chrome Frame (as a plugin to IE I expect).

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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8 Responses to Behavioral Finance Lecture 09: Modeling Endogenous Money

  1. alainton says:

    Watch after supper – but first a US report from 2000 of the Treasury panicking that it would pay off the entire national debt by 2012 and that that this would be disastrous

  2. alainton says:


    You used heuristic as a noun but meant its adjective meaning which is quite different

    It would be more correct to say ‘used as a heuristic first approximation’

  3. enorlin says:

    I’m reflecting on the fact that a 2nd year engineering student taking an introductory course in control theory would probably have a better understanding of the modelling presented in this lecture, than would an econ student at grad level or beyond. That’s almost a bit scary.

  4. Steve Keen says:

    Yes it is Enorlin (and as it happens, Trond Andresen teaches such courses at the Norwegian University of Technology in Trondheim, Norway). That’s why I always recommend that any budding non-orthodox economist do a course in systems engineering first.

  5. alainton says:

    It was a pretty bravura achievement when you derived kaleckis equation from a sraffan surplus approach with a dynamic monetary flow – I almost choked on my coffee seeing the video – no wonder you were pleased with yourself its a kind of post-Keynesian holy grail. No longer separate lumps and camps – but the prospect of a coherent approach. Well done. It will take a while im sure before its noticed.

  6. Steve Keen says:

    Thanks Andrew,

    Yes I was delighted when it dropped out like that. I also was pleased that it began from the neoclassical holy grail of the interaction of supply and demand–but in my case in a dynamic rather than static framework..

    Curiously, I went to a very good seminar with John Eatwell on Thursday, and as well as starting his critique of Neoclassical economics from the same point that I do–the Sonnenschein-Mantel-Debreu conditions–he concluded that what non-neoclassicals need is a pricing equation which breaks away from the slavish equilibrium fixation of neoclassical economics. I didn’t have the opportunity to tell him that it already exists.

  7. Derek R says:

    Must admit that I was excited to see how much further the model has progressed since it was last discussed it on the blog.

  8. alainton says:

    Steve I was wondering if you were going to say anything about Garegani’s death (leaving aside his magpi tendencies with the Sraffa papers)

    I was reminded of a key historical moment of when Garegani questioned Samuelson at a lecture saying his production function depended on a constant capital / labour ration in every sector. Ironic as of course that was the same critique that led to the LTV falling down, and then Samuelson admitting defeat, but him and the world carrying on as normal.

    But here is the crux is not that the same critique that could be nailed at the current development of your macro models, not yet firms with high profits rates spawning, not yet investment reallocations being made via an equity market with others forced to rely on debt. Not yet creative destruction of individual firms and profit lines.

    So – being devils advocate – deposit it being a dynamic monetary model is it not just the kind of dynamic monetary model – long period – monetary model Walras ideally wanted to complete but could never find mathematically tractable? Is the challenge not to complete a full model of the classical competition process where effective demand drops out – Garaganis life challenge?

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