Further Insights on Endogenous Money and the Liquidity Preference Theory of Interest

ExSIDE Working Paper Series, No. 03-2018

33 Pages Posted: 22 Jun 2018

See all articles by Marc Lavoie

Marc Lavoie

University of Ottawa - Department of Economics

Severin Reissl

Institute of Advanced Study (IUSS - Pavia)

Date Written: March 13, 2018

Abstract

We present a simple stock-flow 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.

Keywords: horizontalism, structuralism, endogenous money, interest rates, stock- flow consistency

JEL Classification: E5, E12, E40, E43

Suggested Citation

Lavoie, Marc and Reissl, Severin, Further Insights on Endogenous Money and the Liquidity Preference Theory of Interest (March 13, 2018). ExSIDE Working Paper Series, No. 03-2018, Available at SSRN: https://ssrn.com/abstract=3193027 or http://dx.doi.org/10.2139/ssrn.3193027

Marc Lavoie

University of Ottawa - Department of Economics ( email )

120 University street
Ottawa, Ontario K1N 6N5
Canada

Severin Reissl (Contact Author)

Institute of Advanced Study (IUSS - Pavia) ( email )

Italy

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