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


  • Marc Lavoie
  • Severin Reissl


We present a simple stock-ow consistent (SFC) model to discuss some recent claims made by Angel Asensio in the Journal of Post Keynesian Economics 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 ignore important mechanisms which can contribute to a better understanding of the behaviour of interest rates. More generally, this paper hence once more demonstrates the utility of the SFC approach in research on monetary economics 1930s.

Suggested Citation

  • Marc Lavoie & Severin Reissl, 2018. "Further insights on endogenous money and the liquidity preference theory of interest," FMM Working Paper 17-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:fmmpap:17-2018

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    References listed on IDEAS

    1. Eugenio Caverzasi & Antoine Godin, 2015. "Post-Keynesian stock-flow-consistent modelling: a survey," Cambridge Journal of Economics, Oxford University Press, vol. 39(1), pages 157-187.
    2. 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.
    3. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters,in: Research Handbook on Central Banking, chapter 20, pages 398-444 Edward Elgar Publishing.
    4. repec:bla:jecsur:v:31:y:2017:i:5:p:1204-1239 is not listed on IDEAS
    5. repec:mes:postke:v:24:y:2001:i:2:p:277-311 is not listed on IDEAS
    6. Victoria Chick & Sheila Dow, 2002. "Monetary Policy with Endogenous Money and Liquidity Preference: A Nondualistic Treatment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 24(4), pages 587-607, July.
    7. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 393-411, July.
    8. repec:mes:postke:v:40:y:2017:i:3:p:327-348 is not listed on IDEAS
    9. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," Economics Working Paper Archive wp_891, Levy Economics Institute.
    10. Marc Lavoie, 2010. "Changes in Central Bank Procedures During the Subprime Crisis and Their Repercussions on Monetary Theory," International Journal of Political Economy, Taylor & Francis Journals, vol. 39(3), pages 3-23.
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    More about this item


    Horizontalism; structuralism; endogenous money; interest rates; stock-flow consistency;

    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
    • 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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