Money's Marketability Premium and the Microfoundations of Keynes's Theory of Money and Interest

Tyler Cowen and Randall S Kroszner

Cambridge Journal of Economics, 1994, vol. 18, issue 4, 379-90

Abstract: The authors argue that Keynes's treatment of the 'Essential Properties of Interest and Money' in Chapter 17 of 'The General Theory' can provide microfoundations for Keynesian explanations of business cycle fluctuations. They focus on how the nature of money's liquidity premium may generate stickiness in the nominal rate of interest. A constant or very slowly changing liquidity premium on real cash balances, which follows from the 'essential properties,' thus provides the foundation for how the money rate of interest 'rules the roost.' Keynes's endorsements of government control of investment, Gesell's money stamping proposal, and mercantilism are consistent with this interpretation. Keynesian results would not obtain if all money and money substitutes were to bear flexible pecuniary returns. Copyright 1994 by Oxford University Press.

Date: 1994
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