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Liquidity preference in the Walrasian framework


  • Icefield, William


John Hicks argued that liquidity preference theory and loanable funds theory are equivalent, because in general equilibrium, Walras law dictates that one (for example, money) market is redundant when other markets (bond, commodities) are in equilibrium. While there are many other well-known criticisms of this point, I take a route that is rarely invoked - that liquidity preference can encode agent's reactions against risk of disequilibrium in a general equilibrium model. In such a case, money market may be in equilibrium, especially due to endogenous money, while other markets are in disequilibrium. In such a case, liquidity preference theory - or theory of money demand - determines rate of interest, as John Maynard Keynes asserted in General Theory, instead of loanable funds theory.

Suggested Citation

  • Icefield, William, 2020. "Liquidity preference in the Walrasian framework," MPRA Paper 98538, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:98538

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    References listed on IDEAS

    1. Randall Wright, 2018. "On the future of macroeconomics: a New Monetarist perspective," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 107-131.
    2. Tsiang, S. C., 1989. "Finance Constraints and the Theory of Money," Elsevier Monographs, Elsevier, edition 1, number 9780127017211 edited by Kohn, Meir.
    3. M. G. Hayes, 2010. "The loanable funds fallacy: saving, finance and equilibrium," Cambridge Journal of Economics, Oxford University Press, vol. 34(4), pages 807-820.
    4. 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.
    5. Don Patinkin, 1958. "Liquidity Preference and Loanable Funds : Stock and Flow Analysis," Economica, London School of Economics and Political Science, vol. 25(100), pages 300-318, November.
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    More about this item


    liquidity preference; loanable funds theory; disequilibrium; general equilibrium; Keynes; Walras law;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D59 - Microeconomics - - General Equilibrium and Disequilibrium - - - Other
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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