Endogenous Money Supply and the Fallacy of the Loanable Funds Framework: Reassessing Credit Creation Mechanisms in Post-Keynesian Monetary Theory
Keywords:
endogenous money supply, loanable funds fallacy, post-Keynesian monetary theory, credit creation, structural vector autoregression, monetary transmission mechanism, bank lending channel, macroprudential regulation, monetary aggregatesAbstract
The loanable funds framework has long served as the dominant paradigm for modeling credit intermediation in mainstream macroeconomic theory. This paper challenges its foundational assumptions by systematically examining endogenous money creation mechanisms through a post-Keynesian analytical lens. Drawing on panel data from 47 central bank balance sheets spanning 2005–2023, supplemented by structural vector autoregression (SVAR) models, we demonstrate that commercial bank lending precedes deposit formation rather than the converse—a finding fundamentally incompatible with the loanable funds hypothesis. Our results indicate statistically significant Granger-causal relationships running from loan origination to broad monetary aggregates (M2/M3), with a mean transmission lag of 2.3 quarters. These findings carry substantial implications for monetary policy transmission mechanisms, interest rate determination, and macroprudential regulatory design under contemporary financialized capitalism.
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