IDEAS home Printed from https://ideas.repec.org/a/mes/postke/v42y2019i4p503-526.html
   My bibliography  Save this article

Further insights on endogenous money and the liquidity preference theory of interest

Author

Listed:
  • Marc Lavoie
  • Severin Reissl

Abstract

We present a simple stock-flow consistent (SFC) model to discuss some recent claims made by Angel Asensio in a paper published in this journal regarding the relationship between endogenous money theory and the liquidity preference theory of the rate of interest. We incorporate Asensio’s assumptions as far as possible and use simulation experiments to investigate his arguments regarding the presence of a crowding-out effect, the relationship between interest rates and credit demand, and the ability of the central bank to steer interest rates through varying the stock of money. We show that in a fully-specified SFC model, some of Asensio’s conclusions are not generally valid (most importantly, the presence of a crowding-out effect is ambiguous), and that in any case, his use of a non-SFC framework leads him to leave aside important mechanisms which can contribute to a better understanding of the behavior of interest rates. More generally, this paper once more demonstrates the utility of the SFC approach in research on monetary economics.

Suggested Citation

  • Marc Lavoie & Severin Reissl, 2019. "Further insights on endogenous money and the liquidity preference theory of interest," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(4), pages 503-526, October.
    • Handle: RePEc:mes:postke:v:42:y:2019:i:4:p:503-526
    DOI: 10.1080/01603477.2018.1548286
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/01603477.2018.1548286
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/01603477.2018.1548286?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Roberto Veneziani & Luca Zamparelli & Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-Flow Consistent Macroeconomic Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1204-1239, December.
    2. Eugenio Caverzasi & Antoine Godin, 2015. "Post-Keynesian stock-flow-consistent modelling: a survey," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 39(1), pages 157-187.
    3. Marc Lavoie & Wynne Godley, 2012. "Kaleckian Models of Growth in a Coherent Stock–Flow Monetary Framework: A Kaldorian View," Palgrave Macmillan Books, in: Marc Lavoie & Gennaro Zezza (ed.), The Stock-Flow Consistent Approach, chapter 6, pages 123-156, Palgrave Macmillan.
    4. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters, in: Peter Conti-Brown & Rosa M. Lastra (ed.), Research Handbook on Central Banking, chapter 20, pages 398-444, Edward Elgar Publishing.
    5. Angel Asensio, 2017. "Insights on endogenous money and the liquidity preference theory of interest," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 40(3), pages 327-348, July.
    6. Louis-Philippe Rochon & Sergio Rossi (ed.), 2017. "Advances in Endogenous Money Analysis," Books, Edward Elgar Publishing, number 4260.
    7. Thomas I. Palley, 2013. "Horizontalists, verticalists, and structuralists: the theory of endogenous money reassessed," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(4), pages 406—424-4, OCT.
    8. Giuseppe Fontana & Mark Setterfield, 2009. "A Simple (and Teachable) Macroeconomic Model with Endogenous Money," Palgrave Macmillan Books, in: Giuseppe Fontana & Mark Setterfield (ed.), Macroeconomic Theory and Macroeconomic Pedagogy, chapter 8, pages 144-168, Palgrave Macmillan.
    9. Giuseppe Fontana & Mark Setterfield (ed.), 2009. "Macroeconomic Theory and Macroeconomic Pedagogy," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-29166-9, December.
    10. Victoria Chick & Sheila Dow, 2002. "Monetary Policy with Endogenous Money and Liquidity Preference: A Nondualistic Treatment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 24(4), pages 587-607, July.
    11. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(4), pages 393-411, July.
    12. Marc Lavoie, 2010. "Changes in Central Bank Procedures During the Subprime Crisis and Their Repercussions on Monetary Theory," International Journal of Political Economy, Taylor & Francis Journals, vol. 39(3), pages 3-23.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marco Missaglia & Patricia Sanchez, 2020. "Liquidity preference in a world of endogenous money: A short-note," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 39(81), pages 595-612, July.
    2. Marco Missaglia & Alberto Botta, 2024. "Households’ Liquidity Preference, Banks’ Capitalization and the Macroeconomy: A Theoretical Investigation," Review of Political Economy, Taylor & Francis Journals, vol. 36(3), pages 1192-1215, July.
    3. Jessica Reale & Frederik Banning & Michael Roos, 2024. "Unemployment Benefits and Job Quality: Unveiling the Complexities of Labour Market Dynamics," Papers 2407.20306, arXiv.org.
    4. Marco Missaglia & Alberto Botta, 2020. "The role of liquidity preference in a framework of endogenous money," Working Papers PKWP2015, Post Keynesian Economics Society (PKES).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roberto Veneziani & Luca Zamparelli & Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-Flow Consistent Macroeconomic Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1204-1239, December.
    2. Richters, Oliver, 2021. "Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 846-866.
    3. Marco Missaglia & Alberto Botta, 2024. "Households’ Liquidity Preference, Banks’ Capitalization and the Macroeconomy: A Theoretical Investigation," Review of Political Economy, Taylor & Francis Journals, vol. 36(3), pages 1192-1215, July.
    4. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.
    5. Peter G. Fennell & David J. P. O’Sullivan & Antoine Godin & Stephen Kinsella, 2016. "Is It Possible to Visualise Any Stock Flow Consistent Model as a Directed Acyclic Graph?," Computational Economics, Springer;Society for Computational Economics, vol. 48(2), pages 307-316, August.
    6. Canelli, Rosa & Fontana, Giuseppe & Realfonzo, Riccardo & Passarella, Marco Veronese, 2024. "Energy crisis, economic growth and public finance in Italy," Energy Economics, Elsevier, vol. 132(C).
    7. Jackson, Tim & Victor, Peter A., 2015. "Does credit create a ‘growth imperative’? A quasi-stationary economy with interest-bearing debt," Ecological Economics, Elsevier, vol. 120(C), pages 32-48.
    8. Kim, Minseong, 2022. "AS-AD model as a stock-flow consistent model," OSF Preprints ceb2z, Center for Open Science.
    9. Christos Pierros, 2021. "Assessing the internal devaluation policy implemented in Greece in an empirical stock‐flow consistent model," Metroeconomica, Wiley Blackwell, vol. 72(4), pages 905-943, November.
    10. Jacques, Pierre & Delannoy, Louis & Andrieu, Baptiste & Yilmaz, Devrim & Jeanmart, Hervé & Godin, Antoine, 2023. "Assessing the economic consequences of an energy transition through a biophysical stock-flow consistent model," Ecological Economics, Elsevier, vol. 209(C).
    11. Eugenio Caverzasi & Alberto Russo, 2018. "Toward a new microfounded macroeconomics in the wake of the crisis," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 27(6), pages 999-1014.
    12. Godin, Antoine, 2014. "Job Guarantee: a Structuralist Perspective," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 16.
    13. Ítalo Pedrosa & Dany Lang, 2018. "Heterogeneity, distribution and financial fragility of non-financial firms: an agent-based stock-flow consistent (AB-SFC) model," Working Papers hal-01937186, HAL.
    14. Dawid J. van Lill, 2017. "Changes in the Liquidity Effect Over Time: Evidence from Four Monetary Policy Regimes," Working Papers 704, Economic Research Southern Africa.
    15. Eduardo Fernández-Huerga & Ana Pardo & Ana Salvador, 2023. "Compatibility and complementarity between institutional and post-Keynesian economics: a literature review with a particular focus on methodology," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(2), pages 413-443, July.
    16. Jacob Assa, 2017. "Leveraged Growth: Endogenous Money and Speculative Credit in a Stock-flow Consistent Measure of Output," Working Papers 1727, New School for Social Research, Department of Economics.
    17. Wonik Park & Byoungkil Min, 2021. "Impacts of Liquidity Preference on Loan-to-Deposit Ratio and Regional Economic Growth: A Post-Keynesian View," Korean Economic Review, Korean Economic Association, vol. 37, pages 37-63.
    18. Özgür Bayram SOYLU, 2020. "A simple model of developing countries: financing the current account deficit Abstract: A stock flow consistent model provides a monetary and financial framework to macroeconomics. It clearly shows th," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 11, pages 123-145, June.
    19. Edwin Le Heron & Tarik Mouakil, 2008. "A Post‐Keynesian Stock‐Flow Consistent Model For Dynamic Analysis Of Monetary Policy Shock On Banking Behaviour," Metroeconomica, Wiley Blackwell, vol. 59(3), pages 405-440, July.
    20. Naqvi, Asjad & Stockhammer, Engelbert, 2018. "Directed Technological Change in a Post-Keynesian Ecological Macromodel," Ecological Economics, Elsevier, vol. 154(C), pages 168-188.

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mes:postke:v:42:y:2019:i:4:p:503-526. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/MPKE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.