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The liquidity preference theory: a critical analysis

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  • Giancarlo Bertocco

    (Department of Economics, University of Insubria, Italy)

  • Andrea Kalajzic

    (Department of Economics, University of Insubria, Italy)

Abstract

Keynes in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this paper is twofold. First, to point out the limits of the liquidity preference theory. Second, to present an explanation of the monetary nature of the interest rate based on the arguments with which Keynes responded to the criticism levelled at the liquidity preference theory by supporters of the loanable funds theory such as Ohlin and Robertson. It is shown that this explanation is consistent with the definition of the non-neutrality of money that Keynes presented in his 1933 works in which he underlines the need to elaborate a monetary theory of production in order to explain the phenomena of the crisis and the fluctuations in income and employment.

Suggested Citation

  • Giancarlo Bertocco & Andrea Kalajzic, 2014. "The liquidity preference theory: a critical analysis," Economics and Quantitative Methods qf1402, Department of Economics, University of Insubria.
    • Handle: RePEc:ins:quaeco:qf1402
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    References listed on IDEAS

    as
    1. Giancarlo Bertocco, 2005. "The Role of credit in a Keynesian monetary economy," Review of Political Economy, Taylor & Francis Journals, vol. 17(4), pages 489-511.
    2. Morishima,Michio, 1992. "Capital and Credit," Cambridge Books, Cambridge University Press, number 9780521418409, September.
    3. Peter Docherty, 2011. "Keynes's Analysis of Economic Crises and Monetary Policy in the General Theory : Its Relevance after 75 Years," Review of Political Economy, Taylor & Francis Journals, vol. 23(4), pages 521-535, October.
    4. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543.
    5. Paul Davidson, 1994. "Post Keynesian Macroeconomic Theory," Books, Edward Elgar Publishing, number 124.
    6. Scott T. Fullwiler, 2006. "Setting interest rates in the modern money era," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 28(3), pages 496-525.
    7. Claude Gnos, 2004. "Is ex-ante ex-post analysis irrelevant to Keynes's theory of employment?," Review of Political Economy, Taylor & Francis Journals, vol. 16(3), pages 335-345.
    8. Giancarlo Bertocco, 2009. "The Economics of Financing Firms : Two Different Approaches," History of Economic Ideas, Fabrizio Serra Editore, Pisa - Roma, vol. 17(1), pages 85-123.
    9. John Smithin, 2003. "Controversies in Monetary Economics," Books, Edward Elgar Publishing, number 2541.
    10. Giancarlo Bertocco, 2007. "The characteristics of a monetary economy: a Keynes--Schumpeter approach," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 31(1), pages 101-122, January.
    11. Yasuo Nishiyama, 2007. "Monetary transmission---federal funds rate and CD rates," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(3), pages 409-426.
    12. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
    13. Giancarlo Bertocco, 2010. "The Endogenous Money Theory and the Characteristics of a Monetary Economy," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 365-402.
    14. Martin H. Wolfson, 1996. "A Post Keynesian Theory of Credit Rationing," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 18(3), pages 443-470, March.
    15. Giuseppe Fontana, 2007. "Keynesian Uncertainty and Money," Chapters, in: Philip Arestis & Malcolm Sawyer (ed.), A Handbook of Alternative Monetary Economics, chapter 26, Edward Elgar Publishing.
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    Cited by:

    1. Marco Missaglia & Alberto Botta, 2020. "The role of liquidity preference in a framework of endogenous money," Working Papers PKWP2015, Post Keynesian Economics Society (PKES).
    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, July.

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