ENDOGENOUS MONEY AND THE BUSINESS-CYCLE

The theory of endogenous money has tended to reduce to a debate over t he slope of the LM. This is because endogenous money is a dynamic phen omenon, and its implications are masked in static models such as ISLM. This paper examines the role of endogenous money in credit-driven bus iness cycles. A key distinction concerns that between bank and direct credit. The former is more expansionary because it involves creation o f new money balances, whereas the latter involves transfer of existing money balances. The paper provides a simulation revealing instability emerges at a lower debt-income ratio as the share of bank debt in tot al debt rises.