Liquidity preference theory revisited: to ditch or to build on it?

Arbeitspapier

This paper revisits Keynes's liquidity preference theory as it evolved from the Treatise on Money to The General Theory and after, with a view of assessing the theory's ongoing relevance and applicability to issues of both monetary theory and policy. Contrary to the neoclassical special case interpretation, Keynes considered his liquidity preference theory of interest as a replacement for flawed saving or loanable funds theories of interest emphasizing the real forces of productivity and thrift. His point was that it is money, not saving, which is the necessary prerequisite for economic activity in monetary production economies. Accordingly, turning neoclassical wisdom on its head, it is the terms of finance as determined within the financial system that rule the roost to which the real economy must adapt itself. The key practical matter is how deliberate monetary control can be applied to attain acceptable real performance. In this regard, it is argued that Keynes's analysis offers insights into practical issues, such as policy credibility and expectations management, that reach well beyond both heterodox endogenous money approaches and modern Wicksellian orthodoxy, which remains trapped in the illusion of money neutrality.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 427

Classification and Topics

• Classification: Wirtschaft ; History of Economic Thought: Macroeconomics ; History of Economic Thought: Individuals ; Economic Methodology ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; Interest Rates: Determination, Term Structure, and Effects ; Monetary Policy
• Subject: liquidity preference theory ; interest rate determination ; loanable funds fallacy ; bank behavior ; monetary policy ; credibility ; liquidity traps ; money neutrality

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bibow, Jörg
• Event: Veröffentlichung
• (who): Levy Economics Institute of Bard College
• (where): Annandale-on-Hudson, NY
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/31594
• Last update: 10.03.2025, 11:44 AM CET