Insights on endogenous money and the liquidity preference theory of interest. Issue 3 (3rd July 2017)

• Record Type: Journal Article
• Authors: Asensio, Angel
• Is Part Of: Journal of post Keynesian economics. Volume 40:Issue 3(2017)
• Page Start: 327
• Page End: 348
• Publication Date: 2017-07-03
• Subjects: Accommodationism -- credit money -- endogenous money -- horizontalism -- interest rate -- liquidity preference -- monetary policy -- structuralism -- verticalism; E5 -- E40 -- E43 -- E44; 330.15
• DOI: 10.1080/01603477.2017.1319248
• Languages: English
• ISSNs: 0160-3477

Abstract

ABSTRACT: It is argued that the debate between "structuralist" and "horizontalist" has long been obscured because of inadequate treatment, in both approaches, of the credit-money supply and of the total money supply. As a result, endogenous money models still have serious limitations today. On the one hand, the bank loan markup and the loan interest rate are exogenous in the horizontalist model, which supposes that they do not depend on the money/liquidity market conditions (as if bank loans did not compete with the existing liquidity). On the other hand, although interest rates are endogenous in the structuralist model, they result from inappropriate treatment of the loan supply and money/liquidity supply. This article aims to remove these shortcomings. It offers a theoretical framework and formal modeling where the creditworthy demand for loans determines the bank loan supply, given the central bank refinancing interest rate, while the total supply and demand for liquidity-money determines the markup and the market rate of interest in accordance with Keynes's liquidity preference theory. In this framework, the post Keynesian theory of endogenous money and Keynes's "verticalist" view prove to be analytically complementary.