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Asset Price Bubbles, Liquidity Preference And The Business Cycle

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  • Korkut A. 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 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.

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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
    DOI: 10.1111/j.1467-999X.2006.00241.x
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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, University Library of Munich, Germany.
    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 Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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