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Asset Price Bubbles, Liquidity Preference and the Business Cycle

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  • Korkut Erturk

Abstract

In his Treatise on Money, Keynes relied on two different themes to argue that the interest rate need not rise with rising levels of expenditure. One of these was the elasticity of the money supply, and the other was the interaction between financial and industrial circulation. A decrease (increase) in what Keynes called the bear position was similar in its impact to that of a policy-induced increase (decrease) in the money supply. In the General Theory, this second line of argument lost much of its force as it became reformulated under the rubric of Keynes liquidity preference theory of interest. Assuming that the interest rate sets the return on capital, Keynes ignored the effect of bull or bear sentiment in equity markets as a second order complication that can be ignored in analyzing the equilibrium level of investment and output. The objective of this paper is to go back to this old theme from the Treatise and underscore its importance for Keynesian theory of the business cycle.

Suggested Citation

  • Korkut Erturk, 2003. "Asset Price Bubbles, Liquidity Preference and the Business Cycle," Working Paper Series, Department of Economics, University of Utah 2003_09, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2003_09
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    References listed on IDEAS

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    1. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
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    4. J. A. Kregel, 1984. "Constraints on the Expansion of Output and Employment: Real or Monetary?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 7(2), pages 139-152, December.
    5. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
    6. L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar Publishing, number 474.
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    Cited by:

    1. Korkut A. ErtŸrk, 2005. "Macroeconomics of Speculation," Economics Working Paper Archive wp_424, Levy Economics Institute.
    2. Korkut Erturk, 2005. "Macroeconomics of Speculation," Macroeconomics 0506010, University Library of Munich, Germany.
    3. Korkut Erturk, 2005. "Macroeconomics of Speculation," Working Paper Series, Department of Economics, University of Utah 2005_02, University of Utah, Department of Economics.
    4. Antonio Carlos Macedo e Silva, 2006. "Detalhes Extraviados E Ausências Conspícuas: Do Treatise À General Theory," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 114, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Korkut A. Erturk, 2006. "Speculation, Liquidity Preference, and Monetary Circulation," Economics Working Paper Archive wp_435, Levy Economics Institute.
    6. Korkut Erturk, 2005. "Speculation, Liquidity Preference and Monetary Circulation," Working Paper Series, Department of Economics, University of Utah 2005_12, University of Utah, Department of Economics.

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    More about this item

    Keywords

    Financial bubbles; speculation; liquidity preference; business cycle;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics

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