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Liquidity Preference, Expected Profitability and Investment

Author

Listed:
  • Koutsobinas, Theodore T.

    (Department of Statistics, Actuarial Studies and Financial Mathematics University of the Aegean)

Abstract

Pendulum shifts in the demand for investment have been consistent with Minskian models because of an institutional tendency towards increasing leverage-ratios when profits increase. The same result is attained through a different route, which was implicit in Keynes’s analysis of liquidity preference. Within this analysis, changes in the state of confidence of investors cause variations in liquidity preference. These variations imply that expected profitability is an inelastic function of the marginal productivity of investment. Following the tradition of Pasinetti, Robinson and Asimakopoulos on investment theory, expected profitability is an autonomous variable. In this paper, this autonomy owes its existence to the introduction of liquidity-preference considerations. If the demand for investment is a function of expected profitability then it is an inelastic function of marginal productivity. This leads to shifts in the demand for investment in a pendulum manner. For the purpose of policy making, this aspect of investment theory is important because it demonstrates the pace at which the business cycle varies through accelerating and decelerating phases.

Suggested Citation

  • Koutsobinas, Theodore T., 2000. "Liquidity Preference, Expected Profitability and Investment," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 53(1), pages 69-83.
    • Handle: RePEc:ris:ecoint:0256
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    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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