Abstract for: The Endogenous Money IS-LM Model of the Debt Money System (Part II) – Loanable Funds vs Endogenous Money

In Part II we expand the endogenous money IS-LM model presented in part I into more comprehensive models by adding budget equations based on Accounting System Dynamics (ASD) approach. The first model is called Loanable Funds IS-LM where money stock is exogenously given by the central bank, and banks play a role as intermediaries of existing funds. The second model is called Endogenous Money IS-LM where central and private banks finance loans by creating deposits when non-banking sectors borrow money. The first model failed to support the Keynesian view that aggregate demand creates its supply. The second model, on the other hand, is shown to support the view that aggregate demand creates its supply (production). The endogenous money IS-LM model also successfully reproduces the dynamics of the Great Depression obtained in Part I model, and the Japan’s lost three decades, which were unexplained in Part I model. The second model also captures the money-debt relationship and its decomposition where the government debts approximate M1, and total debts held by households and producers approximate time deposits respectively. Our simulation analyses indicate that the endogenous money IS-LM model could serve as a new framework for theoretical and applied case studies.