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Endogenous interest rate with accommodative money supply and liquidity preference

Author

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  • Angel Asensio

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

Abstract

The paper offers theoretical discussion and modelling showing that -in accordance to the post Keynesian approach to endogenous money- the credit-worthy demand for loans determines the supply of loans at the prevailing interest rate, while -in accordance with Keynes's liquidity preference theory- the rate of interest is endogenously determined as to equalize the demand and supply of liquidity-money in terms of stocks. As a consequence, the markup reflected in the spread between the central bank refinancing interest rate and the market interest rate is endogenously determined by the total demand and supply of liquidity-money. The paper also argues that, while the central bank effectively controls the base interest rate, additional conditions are required to control the liquidity-money market interest rate, owing to the conventional nature of the rate of interest Keynes pointed out.

Suggested Citation

  • Angel Asensio, 2019. "Endogenous interest rate with accommodative money supply and liquidity preference," Working Papers halshs-01231469, HAL.
    • Handle: RePEc:hal:wpaper:halshs-01231469
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01231469v2
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    References listed on IDEAS

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    1. 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.
    2. Marc Lavoie, 2014. "Post-Keynesian Economics: New Foundations," Post-Print hal-01343652, HAL.
    3. Arestis, Philip & Howells, Peter, 1999. "The Supply of Credit Money and the Demand for Deposits: A Reply," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(1), pages 115-119, January.
    4. Peter Howells, 2009. "Money and Banking in a Realistic Macro Model," Palgrave Macmillan Books, in: Giuseppe Fontana & Mark Setterfield (ed.), Macroeconomic Theory and Macroeconomic Pedagogy, chapter 9, pages 169-187, Palgrave Macmillan.
    5. 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.
    6. Giuseppe Fontana & Mark Setterfield (ed.), 2009. "Macroeconomic Theory and Macroeconomic Pedagogy," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-29166-9, March.
    7. Lavoie, Marc, 1999. "The Credit-Led Supply of Deposits and the Demand for Money: Kaldor's Reflux Mechanism as Previously Endorsed by Joan Robinson," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(1), pages 103-113, January.
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    More about this item

    Keywords

    Accommodationism; Credit-money; Endogenous money; Horizontalism; Interest rate; Liquidity preference; Monetary policy; Verticalism; Structuralism;
    All these keywords.

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