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Evidence on Stabilising Speculation: Leijonhufvud on Keynes

In: Inflation, Institutions and Information

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  • Richard Sweeney

Abstract

One focus of Leijonhufvud’s work is the interaction of expectation and speculation. In his understanding of Keynes, for example, speculators transmit real shocks to aggregate demand to movements in real variables by not allowing ‘the’ (real) interest rate to adjust to its new long-run equilibrium value.1 A fall in the investment schedule, accompanied by a fall in the business sector’s excess supply of bonds, puts upward pressure on bond prices (downward pressure on bond yields and interest rates). Instead of the interest rate falling to keep the level of aggregate demand equal to the full-employment level of aggregate supply, deficient aggregate demand arises because speculators keep the interest rate close to the initial level that is now too high. Speculators cause this problem, not out of perversity, but because they expect the current downward pressure on bond yields soon to reverse; they act on these beliefs in an attempt to profit. Similarly, speculators play a key role in determining the nominal (and real2) exchange rate.

Suggested Citation

  • Richard Sweeney, 1996. "Evidence on Stabilising Speculation: Leijonhufvud on Keynes," Palgrave Macmillan Books, in: Daniel Vaz & Kumaraswamy Velupillai (ed.), Inflation, Institutions and Information, chapter 11, pages 273-289, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-13521-9_11
    DOI: 10.1007/978-1-349-13521-9_11
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