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Uncertainty and money: Keynes, Tobin and Kahn and the disappearance of the precautionary demand for money from liquidity preference theory

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  • Fernando J. Cardim de Carvalho

Abstract

Keynes answered to critics of the General Theory, in 1937, that they failed to realize that there were two main innovations in that work. The first, was the relationship between money demand and uncertainty; the second was the consumption multiplier. The relation between money demand and uncertainty was in fact the main reason to explain why aggregate demand could fall short of full employment income. However, this was explained by Keynes in 1937 by recourse to a form of precautionary demand for money. In The GT, Keynes had actually merged the precautionary demand into the transactions demand for money, making it very difficult for any reader, friendly or unfriendly, to actually see what he meant in 1937. As a result, Keynes liquidity preference theory of the interest rate in the GT exhibited some important shortcomings that were the subject of many reexaminations, including one by Richard Kahn and another by James Tobin. The paper evaluates Keynes's views, Kahn's and Tobin's solutions to Keynes's dilemmas. At its conclusion it is shown why these themes remain relevant today, particularly when financial systems are in turmoil. Copyright The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

Suggested Citation

  • Fernando J. Cardim de Carvalho, 2010. "Uncertainty and money: Keynes, Tobin and Kahn and the disappearance of the precautionary demand for money from liquidity preference theory," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 34(4), pages 709-725.
    • Handle: RePEc:oup:cambje:v:34:y:2010:i:4:p:709-725
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    File URL: http://hdl.handle.net/10.1093/cje/bep020
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    Cited by:

    1. Jacek Pietrucha & Grzegorz Maciejewski, 2020. "Precautionary Demand for Cash and Perceived Risk of Electronic Payments," Sustainability, MDPI, vol. 12(19), pages 1-25, September.
    2. Tibor Tatay & Zsanett Orlovits & Zsuzsanna Novák, 2022. "Inhomogeneous Financial Markets in a Low Interest Rate Environment—A Cluster Analysis of Eurozone Economies," Risks, MDPI, vol. 10(10), pages 1-22, October.
    3. Pei-Tha Gan, 2019. "Economic uncertainty, precautionary motive and the augmented form of money demand function," Evolutionary and Institutional Economics Review, Springer, vol. 16(2), pages 397-423, December.
    4. Konstantinos Loizos, 2020. "The interbank market, Keynes’s degree of confidence and the link between banks’ liquidity and solvency," Working Papers PKWP2017, Post Keynesian Economics Society (PKES).
    5. Jacek Pietrucha, 2021. "Drivers of the Cash Paradox," Risks, MDPI, vol. 9(12), pages 1-17, December.

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