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Further insights on endogenous money and the liquidity preference theory of interest

Marc Lavoie and Severin Reissl

No 17-2018, FMM Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: We present a simple stock-ow consistent (SFC) model to discuss some recent claims made by Angel Asensio in the Journal of Post Keynesian Economics regarding the relationship between endogenous money theory and the liquidity preference theory of the rate of interest. We incorporate Asensio's assumptions as far as possible and use simulation experiments to investigate his arguments regarding the presence of a crowding-out effect, the relationship between interest rates and credit demand, and the ability of the central bank to steer interest rates through varying the stock of money. We show that in a fully-specified SFC model, some of Asensio's conclusions are not generally valid (most importantly, the presence of a crowding-out effect is ambiguous), and that in any case, his use of a non-SFC framework leads him to ignore important mechanisms which can contribute to a better understanding of the behaviour of interest rates. More generally, this paper hence once more demonstrates the utility of the SFC approach in research on monetary economics 1930s.

Keywords: Horizontalism; structuralism; endogenous money; interest rates; stock-flow consistency (search for similar items in EconPapers)
JEL-codes: E5 E12 E40 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pke
Date: 2018
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