Endogenous Money Supply and the Redundancy of the Quantity Theory: Reassessing Monetary Transmission Mechanisms Under Post-Keynesian Credit Dynamics

Abstract

This paper critically re-examines the theoretical foundations of the Quantity Theory of Money (QTM) in light of endogenous money creation frameworks, challenging its continued application in contemporary central bank policy design. Drawing on post-Keynesian monetary circuit theory, balance-sheet mechanics of commercial bank lending, and panel data from 38 OECD economies spanning 2005–2023, we demonstrate that the exogenous money multiplier model systematically misrepresents monetary transmission channels under modern credit-driven financial architectures. Employing structural vector autoregression (SVAR) and dynamic factor models, our results confirm that broad money aggregates are demand-determined endogenous outcomes rather than policy-controlled instruments. These findings carry significant implications for inflation targeting regimes, quantitative easing efficacy assessments, and macroprudential regulatory calibration across advanced and emerging market economies.