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Asset Price Bubbles, Liquidity Preference And The Business Cycle


  • Korkut A. Erturk


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 expected return on capital adjusts to the interest rate in short-period equilibrium, 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. Copyright © 2006 The Author; Journal compilation © 2006 Blackwell Publishing Ltd.

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  • Korkut A. Erturk, 2006. "Asset Price Bubbles, Liquidity Preference And The Business Cycle," Metroeconomica, Wiley Blackwell, vol. 57(2), pages 239-256, May.
  • Handle: RePEc:bla:metroe:v:57:y:2006:i:2:p:239-256

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    References listed on IDEAS

    1. Dimitri B. Papadimitriou & Michalis Nikiforos & Gennaro Zezza, 2014. "Prospects and Policies for the Greek Economy," Economics Strategic Analysis Archive sa_feb_14, Levy Economics Institute.
    2. Chiarella,Carl & Flaschel,Peter & Franke,Reiner, 2011. "Foundations for a Disequilibrium Theory of the Business Cycle," Cambridge Books, Cambridge University Press, number 9780521369923, March.
    3. Day, Richard H. & Yang, Chengyu, 2009. "From Keynes to Solow to optimal growth: An encompassing model of monetary and fiscal policy," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 780-795, November.
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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. "Speculation, Liquidity Preference and Monetary Circulation," Working Paper Series, Department of Economics, University of Utah 2005_12, University of Utah, Department of Economics.
    3. Korkut A. Erturk, 2006. "On the Minskyan Business Cycle," Economics Working Paper Archive wp_474, Levy Economics Institute.
    4. Korkut Erturk, 2005. "Macroeconomics of Speculation," Working Paper Series, Department of Economics, University of Utah 2005_02, University of Utah, Department of 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. "Macroeconomics of Speculation," Macroeconomics 0506010, EconWPA.
    7. 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 Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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