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In this paper, we build a simple model on the role of households' liquidity preference in the determination of economic performance. We postulate, for the sake of the argument, a purely 'horizontalist' environment, i.e., a world of endogenous money where the central bank is able to fix the interest rate(s) at a level of its own willing. We show that even in such a framework liquidity preference, while obviously not constituting anymore a theory for the determination of the interest rate, continues to be a key element for the determination of both the level and evolution over time of aggregate income and capital accumulation. In our model, this happens because of the working of a mechanism so far unexplored in the literature, i.e., the endogenous variations of banks' policy of profits' distribution in response to changes in the liquidity preference of the public. [ABSTRACT FROM AUTHOR]

This paper examines the long-run pattern of the U.S. nonfinancial corporate sector's liquid financial asset holdings in the period from 1951 to 2018. My approach to examining this pattern builds from the banks' liquidity preference theory put forward in Keynes' 1937 papers, as well as Minsky's 1957 paper discussing the role of financial innovation in the banks' management of liquidity preference. I argue that financial intermediaries affect nonfinancial corporations' liquid asset holdings through two primary money creation channels: (1) banks' commercial and industrial loans advanced to nonfinancial corporations and (2) the liquidity premium of financial intermediaries, which can be measured by the interest rate spread in the intermediaries' liabilities markets. Through theoretical and empirical exercises, I find that these two endogenous liquidity creation channels have been the important factors accounting for liquid asset accumulation by the nonfinancial corporate sector. Overall, my results suggest that financial innovations, structural changes of the U.S. financial system, and financial intermediaries' liquidity premium could contribute to our understanding of the shift in nonfinancial corporations' asset portfolio composition in favor of liquid financial assets. [ABSTRACT FROM AUTHOR]

Tracy Mott was best known as a scholar of the work of Michal Kalecki, but he also made an important contribution to Keynesian liquidity preference theory. In 1983 Tom Asimakopulos generated a firestorm in the Post Keynesian community with a series of articles claiming that while Keynes's argument is that investment creates an equivalent amount of saving, this is true only ex post, after the multiplier has fully operated. Meantime, lack of savings could inhibit investment as the supply of bonds for long-term finance would exceed the supply of savings, driving up interest rates. Several Post Keynesians vociferously responded in defense of Keynes. Mott's contribution to the debate approached the subject from a perspective that was more heavily influenced by Kalecki, Robinson, and Marx. Not only does the outcome of this debate impact our view of investment finance, but it also has implications for our view of financing government deficits. In this piece, I look back at Mott's contribution to our understanding of liquidity preference, taking account of developments in Post Keynesian thought over the past four decades. The two most obvious and relevant are the endogenous money approach and Modern Money Theory. [ABSTRACT FROM AUTHOR]

ABSTRACT Keynes and Hayek are usually perceived in the history of economic thought as intellectual rivals. Although it is true that in terms of policy recommendations, they have not always seen eye to eye, there are numerous theoretical elements that the two economists tend to share. This is especially true if one follows Axel Leijonhufvud (1976) in considering that Keynes’s fundamental theoretical work is the Treatise and not the General Theory. In the early 1930s, following the works of Wicksell (1989), both explained business cycles as caused by a discrepancy between savings and investment. They considered that in the modern economy the interest rate cannot speedily adjust these two magnitudes. To a certain extent, Keynes and Hayek even agreed on the dynamic sequence of prices in a “normal” depression. By the time the General Theory came out, liquidity preference obscured most of the commonalities between the two economists. Although Hayek introduced liquidity preference as a short run friction in his 1941 Pure Theory of Capital, he could not accept it as a fundamental determinant of the interest rate. However, in the 1970s Hayek began to believe that “normal” Hayekian crises could further degenerate into Keynesian depressions. By focusing on Keynes’s theoretical development prior to the elaboration of the General Theory in parallel with Hayek’s evolution throughout his life, we argue that a selective reading of their works could lead to a theoretical model in which Keynesian and Hayekian scenarios are specific cases of a more general theory.

Between 2008 and 2020 it has been a common practice among main central banks to keep the policy rate at or around zero. Apart from the expected macroeconomic consequences described partly by liquidity trap theories and structural macroeconomic models discussing the effectiveness of economic policy at the zero lower bound (ZLB), moderate interest rates have a notable influence on the portfolio optimising decisions of economic actors as well. The paper thus endeavours to reveal the wealth effect at the ZLB. Firstly, it compares how the various monetary aggregates and sectoral portfolios changed in the USA and in the eurozone between 2000 and 2020 contrasting the empirical facts with the theoretical assumptions and the experience of the Japan’s lost decade. Secondly, it examines the impact of the common monetary policy at the ZLB on the portfolio structure of individual countries of the eurozone. Hierarchical cluster analysis is applied using Eurostat sectoral financial asset statistics for selected years between 2005 and 2019. After choosing the best asset-to-GDP variables of sectoral financial asset holdings, countries are separated in different clusters based on Squared Euclidean distance and variables are standardised to z-scores. The analysis revealed that low interest rates cause significant portfolio rearrangements in the eurozone as a whole. Moreover, there is much greater diversity between individual member states originally than the way monetary policy influenced differences in the portfolio composition of economic sectors, even some convergence between core and periphery countries is observable. [ABSTRACT FROM AUTHOR]

Disagreements over the nature of money and consequent confusions regarding liquidity contribute to difficulties integrating monetary theory into the theory of value. For example, an abundance of market liquidity is assumed in asset pricing, whereas a scarcity of monetary liquidity is deemed necessary for consumer price-level determinacy. This paper builds on the insights gained from the evolution of finance to introduce a distinction between exchange liquidity and redemption liquidity as a means of resolving this conceptual dissonance. Both exchange and redemption liquidity can be conceptualised as types of financial option differing in the exercise mechanism offered to the option holder by the option-writer. [ABSTRACT FROM AUTHOR]

In a simple continuous‐time model where the learning process affects the willingness to hold liquidity, we provide an intuitive explanation of business cycle asymmetry and postcrisis slow recovery. When observing a liquidity shock, individuals rationally increase their subjective probability of re‐encountering it. It leads to an upward jump in liquidity preference and a discrete fall in consumption. Conversely, as a period without shocks continues, they gradually decrease the subjective probability, reduce liquidity preference, and increase consumption. The recovery process is particularly slow after many shocks are observed within a short period because people do not easily change their pessimistic view. [ABSTRACT FROM AUTHOR]

In the present paper, we investigate the financial homogeneity of the euro area economies by contrasting eurozone countries' responses to monetary policy steps to the theoretical assumptions of the liquidity trap phenomenon. Our assumption is that the euro area economies are not completely homogeneous. Hence, in a zero-interest rate environment, the asset holding decisions of economic agents exhibit detectable differences across countries. We verify our assumptions using Eurostat data. We use the financial asset stocks of the euro area countries to cluster the countries concerned. Previous literature has not examined changes in the ratio of financial assets to GDP, nor differences in structural changes in the total stock of financial assets under the zero lower bound. The paper uses k-centers cluster analysis based on Euclidean distance for detecting changes in the portfolio holdings of eurozone economic actors owing to economic crises and monetary policy responses. The results confirm that euro area financial markets are fragmented. There are significant differences across asset markets of different Eurozone countries, both during and after the crisis. Despite some similarities in the portfolio rearrangement across countries, the ECB's monetary policy does not have a uniform impact on euro area financial markets, and notable differences prevail in the financial asset structures of the economies concerned. [ABSTRACT FROM AUTHOR]

ABSTRACT This paper provides a theoretical account of the role of regional differences in cyclical patterns of credit availability for patterns of regional convergence or divergence. While mainstream theories imply either equalising regional capital flows, or else lower credit availability for peripheral regions due to market imperfections, Post-Keynesian theory of liquidity preference and financial structure imply the scope for greater credit volatility for peripheral regions, especially in downturns, contributing to real economic divergence. This latter account is assessed by means of an empirical analysis of patterns in bank credit over the business cycle among the Spanish regions and Eurozone countries.

The aim of this study is to assess the nature of money supply in the CEMAC area. Specifically, we aim at testing the post-Keynesian endogenous money hypothesis which asserts that money supply is demand-determined and not in the control of the central bank. Contrary to the usual Granger causality tests performed in most studies related to the post-Keynesian theory, we use in this paper a direct test of the endogeneity of money. Using quarterly data from 1990 to 2017, we provide empirical evidence on endogenous money supply in the CEMAC area. Moreover, the structuralist and liquidity preference views are the principal transmission channels of money supply endogeneity in this monetary union. Monetary authorities should consequently shift their policy from the apparent monetary targeting to interest rate targeting, and subsequently to inflation targeting. Moreover, the banking system must undergo profound structural changes. [ABSTRACT FROM AUTHOR]

Using as a test the drawn-out liquidity preference vs loanable funds debate between 1936 and 1956, this paper pursues two lines of inquiries: to illustrate first the progressive conquest of Keynesian macroeconomics by general equilibrium techniques to build the neoclassical synthesis; and, second, to evaluate the epistemological status of the general equilibrium model used by the various debaters who were still confused about the connections between formal models and interpretative contents; hence, they systematically overestimated general equilibrium explanatory capabilities. [ABSTRACT FROM AUTHOR]

In the present paper, we investigate the financial homogeneity of the euro area economies by contrasting eurozone countries’ responses to monetary policy steps to the theoretical assumptions of the liquidity trap phenomenon. Our assumption is that the euro area economies are not completely homogeneous. Hence, in a zero-interest rate environment, the asset holding decisions of economic agents exhibit detectable differences across countries. We verify our assumptions using Eurostat data. We use the financial asset stocks of the euro area countries to cluster the countries concerned. Previous literature has not examined changes in the ratio of financial assets to GDP, nor differences in structural changes in the total stock of financial assets under the zero lower bound. The paper uses k-centers cluster analysis based on Euclidean distance for detecting changes in the portfolio holdings of eurozone economic actors owing to economic crises and monetary policy responses. The results confirm that euro area financial markets are fragmented. There are significant differences across asset markets of different Eurozone countries, both during and after the crisis. Despite some similarities in the portfolio rearrangement across countries, the ECB’s monetary policy does not have a uniform impact on euro area financial markets, and notable differences prevail in the financial asset structures of the economies concerned.

We argue that even in the case that banks are able to maintain the interest rate at a level that they want (the most “radical” version of the theory of endogenous money), liquidity preference continues to constitute a key element when determining the real equilibrium of the economy. In a framework of endogenous money, the Keynesian theory of liquidity preference still constitutes a theory that determines level of income. Financial markets matter, and the Kaldorian idea that liquidity preference “ceases to be of any importance” can only be defended under a set of very restrictive assumptions.

In modern, sophisticated banking systems, in addition to endogenously creating money, banks have the ability to innovate and stretch constraints on their portfolio to potentially raise profits. They fulfill demand for credit according to their liquidity preference and expectations of profits. On the other hand, the monetary authority influences credit supply by changing the availability of liquid assets compared to other assets through monetary policy instruments. By managing liquidity in the reserves market, central banks modify the price of access to short-term liquidity – the interest rate – and, thereby, cause changes in the yield curve and transform banks’ propensity to expand credit. Even though determining credit supply is a difficult task since it depends on expectations and cannot be calculated in advance, this paper aims to determine a credit supply function for Brazil. Our empirical strategy was to estimate a dynamic panel data model on a large cross-section bank-level dataset from the Brazilian Central Bank using balance sheet information from the fifty largest banks operating in the country from 1999 to 2016. Credit outstanding was matched with time-varying indicators that were prepared using data from banks’ portfolios and then combined with macroeconomic variables. We use a Post-Keynesian framework to analyze the relation between credit supply and the balance sheet composition of banks. Our findings suggest that variations in banks’ liquidity preference which are reflected on their changes in flexibility and leverage indicators have a significant impact on credit supply in Brazil.JEL codes: E51, E52, E47

If cryptocurrencies are perceived as financial innovations that could disrupt domestic and international financial systems, it becomes imperative for economists to incorporate these virtual currencies into existing money market models. Cryptocurrencies, when fully adopted by the general public, would transmit into the financial system via money demand. Cryptocurrencies serve as money and non-money assets and have no perfect substitute, whereas they are perfect substitutes for M1. Therefore, how much impact would the popularity of cryptocurrencies have on domestic and international capital mobility? To isolate interest rate differentials across countries, the Mundell-Fleming model that assumes a constant interest rate in domestic and world economies was applied. Cryptocurrencies acquired in past periods that are acceptable worldwide would abrogate exchange rate differentials. This study theoretically finds that fiscal and monetary policies would have different impacts on income in economies with high cryptocurrency circulations compared to economies with only M1. Also, there is a critical interest rate where cryptocurrencies would be more attractive to investors than other non-money assets. Moreover, using the Keynesian aggregate income and aggregate expenditure model, without interest and exchange rate differentials, the worldwide use of cryptocurrencies in international trade would unveil the link between the twin deficits and international capital flows. [ABSTRACT FROM AUTHOR]

This study aims to establish a link between the regional growth rate and the Keynesian concept of Liquidity Preference from a model of Circular Cumulative Causation. Particularly, it replaces Verdoorn's Law by a mutual causal relationship between credit and regional growth rate. The model is represented by a first-order difference equation dynamic system. The analytical solution suggests that regional changes in Liquidity Preference lead to a Center/Periphery pattern of growth. An empirical application is performed for the Brazilian case, using banking variables at state level in a GMM estimation for Dynamic Panel Data. The results corroborate the hypothesis of persistent different growth rates between the more and the less-developed Brazilian regions. [ABSTRACT FROM AUTHOR]

In a recent article of this journal, Claudio Sardoni ([2019]. 'Investment and Saving in a Dynamic Context: The Contribution of Athanasios (Tom) Asimakopulos.' Review of Political Economy 31 (2): 233–246) made four claims: (1) An increase in the propensity to save will lower the long-term interest rate; (2) A higher preference for bonds will lead to lower long-term interest rates; (3) A higher level of investment will lead to a higher long-term interest rate; (4) A larger (exogenous) supply of money will lead to a lower long-term interest rate. We confront these four claims with the help of a simple stock-flow consistent (SFC) model which includes firms, banks and households, with the latter holding either bank deposits or bonds issued by firms, while these firms invest in fixed capital and in inventories. We find that higher investment leads to higher interest rates on bonds in the short run, but not in the medium or long run. Similarly, a higher desired inventories-to-output ratio ends up leading to lower interest rates both in the short and the long run. We conclude that using SFC models is particularly adequate when dealing with issues that integrate real and financial variables. [ABSTRACT FROM AUTHOR]

Copyright of Revista de Economia Contemporânea is the property of Revista de Economia Contemporanea and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Revista de Economia Contemporânea is the property of Revista de Economia Contemporanea and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This paper revisits Keynes's theory of liquidity preference to emphasise its reliance on liquidity. By clarifying the meaning of 'liquidity' in the context of the theory, it is argued that liquidity preference is not based on the demand for money, the most tradable asset, or a theory of bearishness. Instead, liquidity preference represents a demand for price-protected (capital-safe) assets, most directly inside and outside money, but also cash-equivalent quasi-money such as self-liquidating assets and security repurchase agreements (repo). The theory of liquidity preference explains that the public is willing to forgo interest income to hold short-term price-protected assets due to the capital and price uncertainty associated with relying on market liquidity, or how easy it is to convert an asset into money. It follows that the rate of interest is a monetary phenomenon and is determined independently of saving and investment. [ABSTRACT FROM AUTHOR]

Extant literature nearly exclusively explains the current account imbalances in the euro area by blaming wage policy. Mainstream economics considers wage policy as responsible for both trade imbalances and the split between debtor and creditor countries. In contrast, this article argues that cross-border capital flows come first, and affect aggregate demand and production costs. Trade flows and the real exchange rate adjust to financial flows. The rationale of this reversed argument is Keynes’ liquidity theory of interest. The policy implications drawn from the argument point in the direction of more capital controls rather than controls on wage formation. JEL Classification: E12; E43; F36

According to Lavoie and Reissl, stock-flow consistent (SFC) modeling with "fully specified" financial sector allows for a better understanding of the dynamics of monetary economies than less detailed models. Although detailed models can help to identify mechanisms that cannot be captured by simpler models, they also have limitations that are worth bearing in mind when it comes to assess the merits of both kinds of modeling. This note pinpoints some difficulties regarding the conceptual framework and formal treatment of the "fully specified" SFC model, leading to a more balanced assessment regarding economic models. [ABSTRACT FROM AUTHOR]