Liquidity preference in the Walrasian framework

William Icefield

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: liquidity preference; loanable funds theory; disequilibrium; general equilibrium; Keynes; Walras law (search for similar items in EconPapers)
JEL-codes: B22 B41 D59 E12 E20 E43 (search for similar items in EconPapers)
Date: 2020-01-10
New Economics Papers: this item is included in nep-hpe, nep-mac, nep-mon and nep-pke
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