IDEAS home Printed from https://ideas.repec.org/p/awm/wpaper/10.html
   My bibliography  Save this paper

Households’ liquidity preference, banks’ capitalization and the macroeconomy: a theoretical investigation

Author

Listed:
  • Marco Missaglia

    (University of Pavia)

  • Alberto Botta

    (University of Greenwich)

Abstract

In this paper we build a simple model on the role of 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.

Suggested Citation

  • Marco Missaglia & Alberto Botta, 2022. "Households’ liquidity preference, banks’ capitalization and the macroeconomy: a theoretical investigation," Working Papers 10, SITES.
    • Handle: RePEc:awm:wpaper:10
    Note: SITES Working Papers 10
    as

    Download full text from publisher

    File URL: https://www.sitesideas.org/wp-content/uploads/2022/06/Sites_wp10.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chang, Winston W & Hamberg, Daniel & Hirata, Junichi, 1983. "Liquidity Preference as Behavior toward Risk Is a Demand for Short-Term Securities-Not Money," American Economic Review, American Economic Association, vol. 73(3), pages 420-427, June.
    2. Lavoie, Marc, 1996. "Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(3), pages 275-300, August.
    3. Basil J. Moore, 1988. "The Endogenous Money Supply," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 10(3), pages 372-385, March.
    4. E. Le Héron, 2019. "Endogenous Money, Liquidity Preference and Confidence: For a qualitative theory of money," Post-Print halshs-02890871, HAL.
    5. Marc Lavoie & Gennaro Zezza, 2020. "A Simple Stock-Flow Consistent Model with Short-Term and Long-Term Debt: A Comment on Claudio Sardoni," Review of Political Economy, Taylor & Francis Journals, vol. 32(3), pages 459-473, July.
    6. Hyman Minsky, 1994. "Financial instability and the decline(?) of banking: public policy implications," Proceedings 20, Federal Reserve Bank of Chicago.
    7. Benjamin Cohen, 2013. "How have banks adjusted to higher capital requirements?," BIS Quarterly Review, Bank for International Settlements, September.
    8. Costas Lapavitsas & Ivan Mendieta-MuÃ’oz, 2017. "Explaining the Historic Rise in Financial Profits in the US Economy," Working Papers 205, Department of Economics, SOAS University of London, UK.
    9. Marc Lavoie, 2014. "Post-Keynesian Economics: New Foundations," Post-Print hal-01343652, HAL.
    10. 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.
    11. Carlin, Wendy & Soskice, David, 2014. "Macroeconomics: Institutions, Instability, and the Financial System," OUP Catalogue, Oxford University Press, number 9780199655793.
    12. Yannis Dafermos, 2012. "Liquidity preference, uncertainty, and recession in a stock-flow consistent model," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(4), pages 749-776.
    13. Louis-Philippe Rochon, 1997. "Keynes's Finance Motive: a re-assessment. Credit, liquidity preference and the rate of interest," Review of Political Economy, Taylor & Francis Journals, vol. 9(3), pages 277-293.
    14. Thomas I. Palley, 1994. "Competing Views Of The Money Supply Process: Theory And Evidence," Metroeconomica, Wiley Blackwell, vol. 45(1), pages 67-88, February.
    15. José Luis Oreiro & Luiz Fernando de Paula & João Pedro Heringer Machado, 2020. "Liquidity preference, capital accumulation and investment financing: Fernando Carvalho’s contributions to the Post-Keynesian paradigm," Working Papers PKWP2007, Post Keynesian Economics Society (PKES).
    16. Giuseppe Fontana & Mark Setterfield (ed.), 2009. "Macroeconomic Theory and Macroeconomic Pedagogy," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-29166-9.
    17. 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.
    18. Michael Hudson, 2010. "The Transition from Industrial Capitalism to a Financialized Bubble Economy," Economics Working Paper Archive wp_627, Levy Economics Institute.
    19. Giancarlo Bertocco & Andrea Kalajzić, 2018. "The Zero Lower Bound and the Asymmetric Efficacy of Monetary Policy: A View from the History of Economic Ideas," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 4(3), pages 549-566, November.
    20. Thomas I. Palley, 2017. "The theory of endogenous money and the LM schedule: prelude to a reconstruction of ISLM," Brazilian Journal of Political Economy, Center of Political Economy, vol. 37(1), pages 3-22.
    21. 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.
    22. José Luis Oreiro & Luiz Fernando de Paula & João Pedro Heringer Machado, 2020. "Liquidity Preference, Capital Accumulation and Investment Financing: Fernando Cardim de Carvalho’s Contributions to the Post-Keynesian Paradigm," Review of Political Economy, Taylor & Francis Journals, vol. 32(1), pages 121-139, July.
    23. L. Randall Wray, 1992. "Commercial Banks, the Central Bank, and Endogenous Money," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 14(3), pages 297-310, March.
    24. Claudio Sardoni, 2020. "Saving and Investment Financing: Different Approaches," Review of Political Economy, Taylor & Francis Journals, vol. 32(3), pages 474-480, July.
    Full references (including those not matched with items on IDEAS)

    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. Marco Missaglia & Alberto Botta, 2020. "The role of liquidity preference in a framework of endogenous money," Working Papers PKWP2015, Post Keynesian Economics Society (PKES).
    2. Bibi, Samuele & Canelli, Rosa, 2023. "The interpretation of CBDC within an endogenous money framework," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. 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.
    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. repec:hal:cepnwp:halshs-01231469 is not listed on IDEAS
    6. 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.
    7. Giuseppe Fontana, 2004. "Rethinking Endogenous Money: A Constructive Interpretation Of The Debate Between Horizontalists And Structuralists," Metroeconomica, Wiley Blackwell, vol. 55(4), pages 367-385, November.
    8. Angel Asensio, 2019. "Endogenous interest rate with accommodative money supply and liquidity preference," Working Papers halshs-01231469, HAL.
    9. Claudio Sardoni, 2017. "Circuitist and Keynesian Approaches to Money: A Reconciliation?," Metroeconomica, Wiley Blackwell, vol. 68(2), pages 205-227, May.
    10. 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.
    11. Boyao Li, 2023. "The macroeconomic effects of endogenous credit and money creation under Basel III regulations," Metroeconomica, Wiley Blackwell, vol. 74(4), pages 887-907, November.
    12. Levrero, Enrico Sergio & Deleidi, Matteo, 2017. "The money creation process: A theoretical and empirical analysis for the US," MPRA Paper 81970, University Library of Munich, Germany.
    13. Kurt, Ozan Ekin, 2022. "Effects of interest rates on functional income distribution, capacity utilization, capital accumulation and profit rates in France: A post-Kaleckian econometric analysis," EconStor Preprints 251003, ZBW - Leibniz Information Centre for Economics.
    14. Engelbert Stockhammer & Collin Constantine & Severin Reissl, 2020. "Explaining the Euro crisis: current account imbalances, credit booms and economic policy in different economic paradigms," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 43(2), pages 231-266, April.
    15. Váry, Miklós, 2018. "A hiszterézis közgazdasági jelentőségéről posztkeynesi szemléletben [The economic relevance of hysteresis from a post-Keynesian perspective]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1006-1047.
    16. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2017. "A stock-flow-fund ecological macroeconomic model," Ecological Economics, Elsevier, vol. 131(C), pages 191-207.
    17. Nishi, Hiroshi & Stockhammer, Engelbert, 2020. "Distribution shocks in a Kaleckian model with hysteresis and monetary policy," Economic Modelling, Elsevier, vol. 90(C), pages 465-479.
    18. Eckhard Hein, 2019. "Karl Marx: an early post-Keynesian? A comparison of Marx's economics with the contributions by Sraffa, Keynes, Kalecki and Minsky," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 16(2), pages 238-259, September.
    19. Bertocco Giancarlo, 2006. "Some observations about the endogenous money theory," Economics and Quantitative Methods qf0602, Department of Economics, University of Insubria.
    20. Hein, Eckhard, 2010. "The rate of interest as a macroeconomic distribution parameter: Horizontalism and Post-Keynesian models of distribution of growth," MPRA Paper 23372, University Library of Munich, Germany.
    21. Prante, Franz & Hein, Eckhard & Bramucci, Alessandro, 2021. "Varieties and interdependencies of demand and growth regimes in finance-dominated capitalism," IPE Working Papers 173/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

    More about this item

    Keywords

    Liquidity preference; endogenous money; finance dominance;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:awm:wpaper:10. 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: SITES's editorial board (email available below). General contact details of provider: https://sitesideas.org/ .

    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.