A Reinterpretation and Remedy of Keynes’s Liquidity Preference Theory
The dissension on the mechanism of determination of interest rate is always in the center of much confusion and many controversies of monetary economics. Keynes’s liquidity preference theory remains at the core of the center. This paper starts off with analyzing the inherent logic of liquidity preference theory and presents a new interpretation of the theory in a more logical and clear manner. The reinterpretation clearly indicates the necessity of introducing liquidity preference analysis into determination of interest rate, arguing that it is the liquidity preference analysis based on finance motive, rather than on transactions motive, that plays a more fundamental role in determining interest rate. The paper then points out a crucial and unsolved mistake in Keynes’s liquidity preference theory, i.e. interest rate is indeterminate, which is revealed by introducing finance motive into the theory. Further, the paper develops a logically consistent and integrated model of determination of interest rate on the basis of the liquidity preference analysis centered on finance motive. In this model, interest rate is not determined by the demand for and supply of money, but determined by the demand for and supply of idle money.
|Date of creation:||01 Jun 2006|
|Contact details of provider:|| Postal: Pavillon Lucien Brault, 101 rue Saint Jean-Bosco, Gatineau (Québec) J8Y 3G5|
Phone: (819) 595-3900
Fax: (819) 773-1747
Web page: http://www.repad.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:pqs:wpaper:072006. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Calmes)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.