In aneconomicmodel, anexogenous variable is one whose measure is determined outside the model and is imposed on the model, and an exogenous change is a change in an exogenous variable.[1]: p. 8 [2]: p. 202 [3]: p. 8 In contrast, anendogenous variable is a variable whose measure is determined by the model. An endogenous change is a change in an endogenous variable in response to an exogenous change that is imposed upon the model.[1]: p. 8 [3]: p. 8
The term 'endogeneity' ineconometrics has a related but distinct meaning. An endogenous random variable iscorrelated with theerror term in the econometric model, while an exogenous variable is not.[4]
In theLM model of interest rate determination,[1]: pp. 261–7 the supply of and demand formoney determine theinterest rate contingent on the level of the money supply, so themoney supply is an exogenous variable and the interest rate is an endogenous variable.
An economic variable can be exogenous in some models and endogenous in others. In particular this can happen when one model also serves as a component of a broader model. For example, theIS model of only the goods market[1]: pp. 250–260 derives themarket-clearing (and thus endogenous) level ofoutput depending on the exogenously imposed level ofinterest rates, since interest rates affect thephysical investment component of the demand for goods. In contrast, theLM model of only the money market takes income (whichidentically equals output) as exogenously given and affectingmoney demand; here equilibrium of money supply and money demand endogenously determines the interest rate. But when the IS model and the LM model are combined to give theIS-LM model,[1]: pp. 268–9 both the interest rate and output are endogenously determined.
