Endogenous Money Supply Doctrine Versus Loanable Funds Theory: Reconciling Post-Keynesian Credit Creation Mechanics with Neoclassical Intermediation Paradigms Under Basel III Constraints

Abstract

The longstanding dichotomy between endogenous money supply doctrine and loanable funds theory has persisted as a foundational fault line in macroeconomic thought, generating persistent misalignments in monetary policy transmission modeling. This study applies a dynamic stochastic general equilibrium (DSGE) framework augmented with balance-sheet heterogeneity to reexamine credit creation mechanics across seventeen OECD economies over the period 2010–2023. Employing panel vector autoregression (PVAR) and structural impulse-response analysis, the findings demonstrate that commercial bank lending operates predominantly through endogenous deposit creation rather than intermediated savings mobilization, critically undermining standard loanable funds assumptions embedded in canonical monetary models. Results further indicate that Basel III capital adequacy constraints modulate, but do not fundamentally reverse, endogenous credit dynamics. Policy implications for central bank forward guidance and macroprudential regulation are discussed.