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Animal spirits, liquidity-preference and Keynesian behavioural macroeconomics: An intertemporal framework

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  • Koutsobinas, Theodore

Abstract

Abstract The utilization of a real-interest rate rule in Romer’s new-Keynesian IS-MP approach, which is consistent with new synthesis intertemporal baseline macroeconomic models, provides a contemporary alternative to the standard old-Keynesian IS-LM model and moves back the emphasis on general accounts of the macroeconomic process. Despite its merits, the IS-MP approach neglects completely the influence of the liquidity-preference typically associated in pure Keynes framework with the impact of confidence and animal spirits. In the present article, we show how the macroeconomic process takes place in terms of both a real interest-rate rule and liquidity-preference through the yield curve. This new synthesis, which is shown to be consistent with standard intertemporal analysis, proves to be useful not only because it maintains the illustrative advantages of either the old-Keynesian model with respect to liquidity-preference or the new-Keynesian model with respect to the interest-rate rule but also because it can be utilized as an effective communicative tool among different strands of economic thought.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43027.

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Date of creation: 16 Dec 2011
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Handle: RePEc:pra:mprapa:43027

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Keywords: Liquidity-preference; animal spirits; behavioural macroeconomics; Keynes; IS-MP; intertemporal models; long-term interest rate; yield curve;

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  1. Matthew Canzoneri & Robert Cumby & Behzad Diba & David Lãpez-Salido, 2008. "Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(8), pages 1667-1698, December.
  2. Robert J. Shiller, 2010. "How Should the Financial Crisis Change How We Teach Economics?," The Journal of Economic Education, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(4), pages 403-409, September.
  3. James Tobin, 1982. "Money and Finance in the Macro-Economic Process," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 613R, Cowles Foundation for Research in Economics, Yale University.
  4. Theodore T. Koutsobinas, 2011. "Liquidity preference in a portfolio framework and the monetary theory of Kahn," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 35(4), pages 751-769.
  5. Fisher, W.H. & Turnovsky, S.J., 1991. "Fiscal Policy and the term Structure of Interest Rates: An Intertemporal Optimizing Analysis," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 91-20, Department of Economics at the University of Washington.
  6. Akerlof, George A., 2001. "Behavioral Macroeconomics and Macroeconomic Behavior," Nobel Prize in Economics documents, Nobel Prize Committee 2001-4, Nobel Prize Committee.
  7. Michael Woodford, 2010. "Financial Intermediation and Macroeconomic Analysis," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(4), pages 21-44, Fall.
  8. Shiller Robert J., 2009. "Policies to Deal with the Implosion in the Mortgage Market," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 9(3), pages 1-25, March.
  9. Peter Howells & Iris Biefang-Frisancho Mariscal, 2005. "Monetary Policy Regimes: a fragile consensus," Working Papers 0512, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  10. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(2), pages 149-169, Spring.
  11. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262022834, December.
  12. M. Woodford., 2010. "Convergence in Macroeconomics: Elements of the New Synthesis," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 10.
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