Towards a theory of endogenous financial instability and debt-deflation

Post-Keynesian and heterodox critiques have challenged the Monetarist assumptions of an exogenous money supply and the doctrine of monetary neutrality in the long run. Within these heterodox currents, there has emerged a widespread consensus that the money supply is endogenous—governed by the demand for credit and by the Keynesian notion of liquidity preferences. These heterodox theories also reinstate the original insights by Keynes over the critical issue of uncertainty in the behavior of investors, which contradicts the assumptions of rational expectations. This article will examine some of these intellectual currents in order to develop a more rigorous interpretation of the root causes of financial turbulence.