Asset Price Bubbles, Liquidity Preference and the Business Cycle

Korkut Erturk

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: In his Treatise on Money, Keynes relied on two different themes to argue that the interest rate need not rise with rising levels of expenditure. One of these was the elasticity of the money supply, and the other was the interaction between financial and industrial circulation. A decrease (increase) in what Keynes called the bear position was similar in its impact to that of a policy-induced increase (decrease) in the money supply. In the General Theory, this second line of argument lost much of its force as it became reformulated under the rubric of Keynes liquidity preference theory of interest. Assuming that the interest rate sets the return on capital, Keynes ignored the effect of bull or bear sentiment in equity markets as a second order complication that can be ignored in analyzing the equilibrium level of investment and output. The objective of this paper is to go back to this old theme from the Treatise and underscore its importance for Keynesian theory of the business cycle.

Keywords: Financial bubbles; speculation; liquidity preference; business cycle (search for similar items in EconPapers)
JEL-codes: B21 E12 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2003
New Economics Papers: this item is included in nep-mac, nep-pke and nep-rmg
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Citations: View citations in EconPapers (6)

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Journal Article: ASSET PRICE BUBBLES, LIQUIDITY PREFERENCE AND THE BUSINESS CYCLE (2006)
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