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A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization

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  • Ono, Yoshiyasu

Abstract

This article is an attempt to formalize Chapter 17 of Keynes's General Theory using a continuous dynamic optimization model with perfect foresight. I present two subjective interest rates: the time preference rate and the liquidity premium that, respectively, govern the consumption-saving and portfolio decisions. Under optimal household behavior, they are equalized to the market rate of interest. In the monetary economy described by Keynes, however, the equality can be inconsistent with the condition of market equilibrium, in which case persistent stagnation occurs. A new analytic method based on dynamic optimization is proposed as an alternative to IS-LM analysis. Copyright 2001 by American Economic Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 42 (2001)
Issue (Month): 1 (February)
Pages: 207-36

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Handle: RePEc:ier:iecrev:v:42:y:2001:i:1:p:207-36
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Cited by:

  1. Ryuzo Miyao, 2002. "Liquidity Trap and the Stability of Money Demand: Is Japan Really Trapped at the Zero Bound?," Discussion Paper Series 127, Research Institute for Economics & Business Administration, Kobe University.
  2. Ken-ichi Hashimoto, 2004. "Intergenerational Transfer and Effective Demand," Economics Bulletin, AccessEcon, vol. 5(1), pages 1-13.
  3. Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, EconWPA.
  4. Yoshiyasu Ono, 2011. "The Keynesian Multiplier Effect Reconsidered," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 787-794, 06.
  5. Yoshiyasu Ono & Katsunori Yamada, 2012. "Difference or Ratio: Implication of Status Preference on Stagnation," ISER Discussion Paper 0856rr, Institute of Social and Economic Research, Osaka University, revised Jan 2014.
  6. HASHIMOTO Ken-ichi, 2011. "Tariffs offshoring and unemployment in a two-country model," ESRI Discussion paper series 272, Economic and Social Research Institute (ESRI).
  7. Ono, Y., 2001. "International Spillover of Economic Fluctuations:A Dynamic Optimization Approach," ISER Discussion Paper 0527, Institute of Social and Economic Research, Osaka University.
  8. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
  9. Ryo Horii & Yoshiyasu Ono, 2004. "Learning, Liquidity Preference, and Business Cycle," ISER Discussion Paper 0601, Institute of Social and Economic Research, Osaka University.
  10. Ryu‐ichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, 05.
  11. Ryu‐ichiro Murota & Yoshiyasu Ono, 2011. "Growth, Stagnation And Status Preference," Metroeconomica, Wiley Blackwell, vol. 62(1), pages 122-149, 02.
  12. Ono, Y., 2001. "Growth or Stagnation: Economic Consequences of Status Preference," ISER Discussion Paper 0524, Institute of Social and Economic Research, Osaka University.
  13. Ken-ichi Hashimoto & Yoshiyasu Ono, 2007. "Does Pro-population Policy Raise Per Capita Consumption?," ISER Discussion Paper 0697, Institute of Social and Economic Research, Osaka University.
  14. repec:dpr:wpaper:0856 is not listed on IDEAS
  15. Ryu-ichiro Murota & Yoshiyasu Ono, 2015. "Fiscal Policy under Long-run Stagnation: A New Interpretation of the Multiplier Effect," ISER Discussion Paper 0937, Institute of Social and Economic Research, Osaka University.
  16. repec:ebl:ecbull:v:5:y:2004:i:1:p:1-13 is not listed on IDEAS
  17. Murota, Ryu-ichiro & Ono, Yoshiyasu, 2015. "Fiscal policy under deflationary gap and long-run stagnation: Reinterpretation of Keynesian multipliers," Economic Modelling, Elsevier, vol. 51(C), pages 596-603.

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