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Further insights on endogenous money and the liquidity preference theory of interest

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  • Marc Lavoie
  • Severin Reissl

Abstract

We present a simple stock-flow consistent (SFC) model to discuss some recent claims made by Angel Asensio in a paper published in this journal regarding the relationship between endogenous money theory and the liquidity preference theory of the rate of interest. We incorporate Asensio’s assumptions as far as possible and use simulation experiments to investigate his arguments regarding the presence of a crowding-out effect, the relationship between interest rates and credit demand, and the ability of the central bank to steer interest rates through varying the stock of money. We show that in a fully-specified SFC model, some of Asensio’s conclusions are not generally valid (most importantly, the presence of a crowding-out effect is ambiguous), and that in any case, his use of a non-SFC framework leads him to leave aside important mechanisms which can contribute to a better understanding of the behavior of interest rates. More generally, this paper once more demonstrates the utility of the SFC approach in research on monetary economics.

Suggested Citation

  • Marc Lavoie & Severin Reissl, 2019. "Further insights on endogenous money and the liquidity preference theory of interest," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(4), pages 503-526, October.
    • Handle: RePEc:mes:postke:v:42:y:2019:i:4:p:503-526
    DOI: 10.1080/01603477.2018.1548286
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    Cited by:

    1. Reale, Jessica & Biondo, Alessio Emanuele, 2025. "Cultural values and interbank markets: An agent-based stock-flow consistent model," Economic Modelling, Elsevier, vol. 147(C).
    2. Marco Missaglia & Patricia Sanchez, 2020. "Liquidity preference in a world of endogenous money: A short-note," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 39(81), pages 595-612.
    3. Jessica Reale & Frederik Banning & Michael Roos, 2024. "Unemployment Benefits and Job Quality: Unveiling the Complexities of Labour Market Dynamics," Papers 2407.20306, arXiv.org.
    4. Marco Missaglia & Alberto Botta, 2024. "Households’ Liquidity Preference, Banks’ Capitalization and the Macroeconomy: A Theoretical Investigation," Review of Political Economy, Taylor & Francis Journals, vol. 36(3), pages 1192-1215, July.
    5. Marco Missaglia & Alberto Botta, 2020. "The role of liquidity preference in a framework of endogenous money," Working Papers PKWP2015, Post Keynesian Economics Society (PKES).

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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