Central Bank’s power versus the tyranny of financial markets: liquidity preference and macroeconomic dynamics in a world of endogenous money

Marco Missaglia and Alberto Botta

No 33405, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: In this paper we build a simple Keynesian model on the role of liquidity preference in the determination of economic performance. We postulate, for the sake of the argument, a purely “horizontalist” environment, i.e., a world of endogenous money where the central bank is able to fix the interest rate at a level of its own willing. In the paper, we show that even in a purely "horizontalist" framework the Keynesian theory of liquidity preference, while obviously not constituting anymore a theory for the determination of the interest rate, continues to be a fundamental piece of theory for the determination of both the level and evolution over time of aggregate income and capital accumulation. We show how households’ liquidity preference (financial markets’ behaviour) and banks’ policy of profits’ distribution interact with each other to determine real macroeconomic outcomes. However powerful, the banking system and monetary authorities are not the deus ex-machina of our economies and financial markets are likely to exert a permanent influence on our economic destiny. We finally draw some policy implications in line with Minsky’s emphasis about the changing role of monetary authorities in ensuring financial markets’ stability in “money-managers” capitalism.

Keywords: Liquidity preference; endogenous money; finance dominance (search for similar items in EconPapers)
Date: 2021-07-21
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