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Endogenous interest rate with accommodative money supply and liquidity preference

Author

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  • Angel Asensio

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

Abstract

The paper offers theoretical discussion and modelling showing that -in accordance to the post Keynesian approach to endogenous money- the credit-worthy demand for loans determines the supply of loans at the prevailing interest rate, while -in accordance with Keynes's liquidity preference theory- the rate of interest is endogenously determined as to equalize the demand and supply of liquidity-money in terms of stocks. As a consequence, the markup reflected in the spread between the central bank refinancing interest rate and the market interest rate is endogenously determined by the total demand and supply of liquidity-money. The paper also argues that, while the central bank effectively controls the base interest rate, additional conditions are required to control the liquidity-money market interest rate, owing to the conventional nature of the rate of interest Keynes pointed out.

Suggested Citation

  • Angel Asensio, 2019. "Endogenous interest rate with accommodative money supply and liquidity preference," Working Papers halshs-01231469, HAL.
    • Handle: RePEc:hal:wpaper:halshs-01231469
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01231469v2
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    References listed on IDEAS

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    1. Marc Lavoie, 2014. "Post-Keynesian Economics: New Foundations," Post-Print hal-01343652, HAL.
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    4. Lavoie, Marc, 1996. "Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(3), pages 275-300, August.
    5. Thomas I. Palley, 2013. "Horizontalists, verticalists, and structuralists: the theory of endogenous money reassessed," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(4), pages 406—424-4, OCT.
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    7. Lavoie, Marc, 1999. "The Credit-Led Supply of Deposits and the Demand for Money: Kaldor's Reflux Mechanism as Previously Endorsed by Joan Robinson," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(1), pages 103-113, January.
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