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

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  • 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
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    References listed on IDEAS

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    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

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