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Theodore T. Koutsobinas - One of the best experts on this subject based on the ideXlab platform.
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Portfolio Allocation, Liquidity-Preference and the q Ratio: A Reassessment of the Contributions of Tobin and Kahn
Review of Political Economy, 2012Co-Authors: Theodore T. KoutsobinasAbstract:This paper compares the implications of Tobin's q theory and Kahn's Post-Keynesian monetary analysis for monetary policy formulation. In recent years, monetary policy formation has taken account of expected market evaluations of equity as well as the effect of long-term government bonds. These evaluations are suggestive of Tobin's q theory as well as Kahn's monetary theory. In contrast to the disparity of views between Keynes and Hicks in 1937, the analysis conducted by Kahn and Tobin in the 1950s and 1960s was set in a multi-asset portfolio context that exhibited a broader disagreement with regard to the influence of Liquidity Preference. Thus, although q is an important variable in Tobin's analysis, Kahn's introduction of the influence of Liquidity premia of various assets in asset demand and the effect of portfolio flows in response to changes in relative Liquidity Preference across assets undermines the usefulness of this ratio. The implications of Kahn's monetary theory are developed in an analysis that presents them in terms of a comparable ratio to q. We find that there are circumstances in which the adjustment of monetary yields across assets and the underlying expectations reveal important information for the formation of monetary policy. In addition, the term structure of interest rates can convey substantial information when it deviates from historical averages and it should be considered separately from the q ratio. Moreover, if the assumptions associated with a monetary theory of interest and production are retained, the q ratio does not need to converge to unity in the long run.
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Liquidity Preference in a portfolio framework and the monetary theory of kahn
Cambridge Journal of Economics, 2011Co-Authors: Theodore T. KoutsobinasAbstract:This paper examines the relation between variations in the propensity towards Liquidity Preference, price-adjustment and shifts in portfolio allocation by expanding Kahn's idea of marginal equilibrium under strong uncertainty in financial markets and contributes to recent post-Keynesian attempts to develop a Liquidity Preference theory of asset prices by providing an analysis of the price-adjustment mechanism. The notion of the own-rate of money interest is utilised to develop a multi-asset Liquidity Preference framework, which is consistent with uneven variations of Liquidity-premia across assets in response to changes in the degree of strong uncertainty that is specific to different investors with variable allocation of assets in their portfolios. More specifically, in the context of this portfolio framework it is established that an increase in the state of strong uncertainty (state of bearishness) makes less liquid assets further less inconvenient than more liquid assets. In periods characterised by greater strong uncertainty, equilibrium is restored through a greater demand for more liquid assets including money relative to the demand for less liquid assets and, therefore, through a higher own-rate of money interest for less liquid assets than warranted, which shows the ineffectiveness of standard monetary policy.
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Liquidity Preference in a portfolio framework and the monetary theory of Kahn
Cambridge Journal of Economics, 2010Co-Authors: Theodore T. KoutsobinasAbstract:This paper examines the relation between variations in the propensity towards Liquidity Preference, price-adjustment and shifts in portfolio allocation by expanding Kahn's idea of marginal equilibrium under strong uncertainty in financial markets and contributes to recent post-Keynesian attempts to develop a Liquidity Preference theory of asset prices by providing an analysis of the price-adjustment mechanism. The notion of the own-rate of money interest is utilised to develop a multi-asset Liquidity Preference framework, which is consistent with uneven variations of Liquidity-premia across assets in response to changes in the degree of strong uncertainty that is specific to different investors with variable allocation of assets in their portfolios. More specifically, in the context of this portfolio framework it is established that an increase in the state of strong uncertainty (state of bearishness) makes less liquid assets further less inconvenient than more liquid assets. In periods characterised by greater strong uncertainty, equilibrium is restored through a greater demand for more liquid assets including money relative to the demand for less liquid assets and, therefore, through a higher own-rate of money interest for less liquid assets than warranted, which shows the ineffectiveness of standard monetary policy. Copyright The Author 2010. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.
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Liquidity Preference, Expected Profitability and Investment
2000Co-Authors: Theodore T. KoutsobinasAbstract:Pendulum shifts in the demand for investment have been consistent with Minskian models because of an institutional tendency towards increasing leverage-ratios when profits increase. The same result is attained through a different route, which was implicit in Keynes’s analysis of Liquidity Preference. Within this analysis, changes in the state of confidence of investors cause variations in Liquidity Preference. These variations imply that expected profitability is an inelastic function of the marginal productivity of investment. Following the tradition of Pasinetti, Robinson and Asimakopoulos on investment theory, expected profitability is an autonomous variable. In this paper, this autonomy owes its existence to the introduction of Liquidity-Preference considerations. If the demand for investment is a function of expected profitability then it is an inelastic function of marginal productivity. This leads to shifts in the demand for investment in a pendulum manner. For the purpose of policy making, this aspect of investment theory is important because it demonstrates the pace at which the business cycle varies through accelerating and decelerating phases.
Yannis Dafermos - One of the best experts on this subject based on the ideXlab platform.
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Liquidity Preference, uncertainty, and recession in a stock-flow consistent model
Journal of Post Keynesian Economics, 2012Co-Authors: Yannis DafermosAbstract:This paper develops a stock-flow consistent model that explicitly integrates the role of Liquidity Preference and perceived uncertainty into the decision-making process of households, firms, and commercial banks. Emphasis is placed on (1) the link between the precautionary motive and the asset choice of the private sector, (2) the effect of perceived uncertainty on the desired margins of safety and borrowing, and (3) the impact of financial obligations on the Liquidity Preference of households and firms. Performing a simulation experiment, the paper illuminates the channels through which a rise in perceived uncertainty is likely to set off a recessionary process.
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Inflation, Employment and Liquidity Preference in a Stock- Flow Consistent Model *
2009Co-Authors: Yannis DafermosAbstract:This paper develops a stock-flow consistent model that integrates the role of Liquidity Preference into the economic behaviour and decision-making process of all private sectors of the economy, namely households, firms and commercial banks. Considerable attention is placed to the analysis of the channels through which the Liquidity Preference of these sectors can potentially affect the performance of a monetary production economy. It is argued that these channels are associated with i) the desired consumption and investment expenditures; ii) the asset allocation of households and banks; iii) the credit rationing and loan repayment procedure; iv) the lending and deposit interest rates; and v) the wage and profit claims of workers and firms respectively. In the simulations conducted we focus particular attention on how an uncertainty shock is likely to affect via the aforementioned channels the dynamics of employment and inflation. Furthermore, we explore the role that fiscal and monetary policy can arguably play if high employment and low inflation are to be attained in an environment of high perceived uncertainty and of diminished state of confidence.
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inflation employment and Liquidity Preference in a stock flow consistent model
2009Co-Authors: Yannis DafermosAbstract:This paper develops a stock-flow consistent model that integrates the role of Liquidity Preference into the economic behaviour and decision-making process of all private sectors of the economy, namely households, firms and commercial banks. Considerable attention is placed to the analysis of the channels through which the Liquidity Preference of these sectors can potentially affect the performance of a monetary production economy. It is argued that these channels are associated with i) the desired consumption and investment expenditures; ii) the asset allocation of households and banks; iii) the credit rationing and loan repayment procedure; iv) the lending and deposit interest rates; and v) the wage and profit claims of workers and firms respectively. In the simulations conducted we focus particular attention on how an uncertainty shock is likely to affect via the aforementioned channels the dynamics of employment and inflation. Furthermore, we explore the role that fiscal and monetary policy can arguably play if high employment and low inflation are to be attained in an environment of high perceived uncertainty and of diminished state of confidence.
Victoria Chick - One of the best experts on this subject based on the ideXlab platform.
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Monetary Policy with Endogenous Money and Liquidity Preference: A Nondualistic Treatment
Journal of Post Keynesian Economics, 2002Co-Authors: Victoria Chick, Sheila C. DowAbstract:This paper builds on a synthesis of endogenous money and Liquidity Preference theory to address the mechanisms by which monetary policy takes effect. We focus on the United Kingdom, under a range of institutional arrangements. Rather than operating solely by means of “the” exogenous interest rate, we consider the real process by which the central bank exerts its influence on the banking system, and how that is transmitted to the credit market and the money market. The focus is on process rather than equilibrium, and on the state of expectations, departing from the usual dualism between the interest rate and the money supply.
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hicks and keynes on Liquidity Preference a methodological approach
Review of Political Economy, 1991Co-Authors: Victoria ChickAbstract:In his last book Sir John Hicks addressed several fundamental questions of monetary theory, from which I have chosen one to discuss in this paper: how to model the influence of flows of savings on securities markets and the rate of interest. His answer is an attempt to integrate the Liquidity Preference and loanable funds theories of interest. I argue that the attempt is, and will remain, unsuccessful, as the loanable funds approach arises from a microeconomic conception which is not capable of integration with macroeconomics.
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Hicks and Keynes on Liquidity Preference: a methodological approach ∗
Review of Political Economy, 1991Co-Authors: Victoria ChickAbstract:In his last book Sir John Hicks addressed several fundamental questions of monetary theory, from which I have chosen one to discuss in this paper: how to model the influence of flows of savings on securities markets and the rate of interest. His answer is an attempt to integrate the Liquidity Preference and loanable funds theories of interest. I argue that the attempt is, and will remain, unsuccessful, as the loanable funds approach arises from a microeconomic conception which is not capable of integration with macroeconomics.
Michael Emmett Brady - One of the best experts on this subject based on the ideXlab platform.
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Joan Robinson on Keynes's Liquidity Preference Function and the Rate of Interest and Her Failure to Grasp the Connection between the General Theory, the Liquidity Preference Function, Uncertainty, and the Weight of the Evidence from the a Treatise on
SSRN Electronic Journal, 2018Co-Authors: Michael Emmett BradyAbstract:Joan Robinson did not understand the connection between Keynes’s concept of the weight of the evidence from the A treatise on Probability and the concept of the weight of the evidence from the General Theory. She mixed up Keynes’s concept of uncertainty, which is based on missing evidence or knowledge, with Shackle’s concept of uncertainty, which is based on the individual decision maker’s imagination and dreams about outcomes where all evidence is missing. For Keynes, the rate of interest is determined by his IS equation and his LP(LM) equation. Uncertainty is brought in as a shift parameter for both equations, schedules, or curves. Joan Robinson had to have seen Keynes’s 1937 article responding to Pigou in the Economic Journal that was sent to both Austin Robinson and Richard Kahn. Keynes explicitly states that his theory of the rate of interest is NOT that the interest rate is determined by the demand and supply of money. Keynes’s theory of the interest rate is an advanced version of his December, 1933 student lecture where he first put forth his IS and LP equations. The two places that Keynes brings all of the elements of his theory together is in Section IV of both Chapter 15 and 21. Section IV of Chapter 15 is brief. Section IV of chapter 21 is extremely detailed. R. Skidelsky has recently stated that the Post Keynesian school of economics is built on Joan Robinson’s work. Her work on Keynes’s theory of Liquidity Preference is partially flawed. It is unclear how the flaws that currently exist can be fixed.
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On the J M Keynes-Joan Robinson Correspondence Between September and November, 1936: How Keynes Finally Came to Realize That Joan Robinson Had No Understanding Whatsoever About His Liquidity Preference Theory of the Rate of Interest or the General Th
SSRN Electronic Journal, 2018Co-Authors: Michael Emmett BradyAbstract:In the course of examining papers sent to him by Joan Robinson for review and comments before publication in late 1936, Keynes discovered that Joan Robinson had absolutely no understanding whatsoever about his theory of the rate of interest, which was based on the Liquidity Preference Function, in the General Theory. Despite repeated attempts by Keynes to correct her errors, Joan Robinson persisted in resisting Keynes’s attempt to repair her deeply flawed work on Liquidity Preference. Keynes finally realized in November 1936 that his acknowledgment of her on page xii of the General Theory regarding her comments on the draft copies of the General Theory he had sent her was mistaken. Keynes had no alternative in his letter to J. Robinson of November 9th, 1936, but to state to her bluntly that “… your argument as it stands is most certainly nonsense.” Robinson’s argument was that the rate of interest is determined by the demand and supply of money alone. Keynes had finally come to realize over the three month time period of their correspondence that Joan Robinson had no grasp whatsoever about his IS-LM(LP) (Hicks’s 1937 IS-LL and Hansen’s 1953 IS-LM are distorted versions of Keynes’s model) model of interest rate determination in Effective Demand (Y) and interest rate (r) space. Robinson viewed Keynes’s Liquidity Preference theory of the rate of interest of the General Theory as a purely monetary theory of the rate of interest that was determined only by the demand for money and the supply of money. According to Robinson, Keynes in the General Theory had shown that the rate of interest is a purely and uniquely determined monetary variable only. Keynes’s Y=C plus I and Y=Cplus S model, leading to the conclusion that I=S, which generates the IS equation on pages 63,115 and page 298 of the General Theory, had no role to play in determining the rate of interest. Therefore, the rate of interest can only be determined by the speculative demand for money,M= L2(r). Keynes had already seen this faulty description of his theory described to him in correspondence with Hawtrey in the January-March, 1936 time period. Keynes ‘s response to Hawtrey was that Hawtrey’s summary was completely wrong. Keynes was surely shocked to see Robinson making the same, identical mistake as Hawtrey. Interestingly, this correspondence between Keynes and Robinson has never been examined at any time by any economist or academic since it first appeared in print in Volume 14 of the CWJMK in 1973. For instance, the only mention made by Skidelsky about this correspondence (1992, p.627) was that the slowness of trains in Europe gave Keynes a chance to “…read the proofs of Joan Robinson’s new book.” The footnote provides no additional information. The reason why this correspondence has never been examined should be obvious. It completely destroys the strident claims, made by the Post Keynesian and Institutionalist schools of economics, that Keynes never presented an IS-LM type model in the General Theory because his theory was a purely monetary theory of the rate of interest only. Practically all of Skidelsky’s work on the General Theory, which was directly based on Joan Robinson, can now be seen to be completely flawed. One comes to the truly bizarre conclusion that the Post Keynesian and Institutionalist schools have, for the last 82 years, based their understanding of the General Theory, not on Keynes, but on Joan Robinson’s badly flawed “interpretation” of Keynes and the General Theory.
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From Keynes Back to Smith and Aristotle: Liquidity Preference, Hoarding, and Speculation
SSRN Electronic Journal, 2017Co-Authors: Michael Emmett BradyAbstract:Aristotle, basing his work on Plato (Socrates), was the first to clearly, explicitly and technically identify how an economy at the macro level could fail. There were four possible ways of analyzing the impact of exchange, one without money and three with money. Aristotle’s literary discussion and analysis can be summarized by these four equations-C-C’ (Barter-no money used), C-M-C’ (medium of exchange function of money - using money to assist and expedite the production of consumer and producer goods), M-C-M’ (commodity speculation-real estate and stock bubbles), and M-M’ (usury; hoarding; accumulation of money; using money to make money without any production of consumer and producer goods). Problems are generated at the macro level if speculative and rentier behavior comes to dominant economic behavior, which is aimed at using money to facilitate the production of consumer and producer goods at the micro level. Keynes recognized where Aristotle’s analysis led to. It led to Keynes’s theory of Liquidity Preference (propensity to hoard) explanation of the rate of interest. Basically, Keynes’s IS equation is a development of Aristotle’s C-M-C’ function, where money is used to facilitate the production of consumer and producer goods. Keynes’s Liquidity Preference function, LP(LM), is a development of Aristotle’s M-C-M’ and M-M’ equations. Of course, Smith had gotten to the core of Aristotle’s theory of money and the consequent economic problems that resulted from its misuse with his distinction between the sober people and the Projectors, Imprudent Risk takers and Prodigals. The Sober people used money as in C-M-C’ while the Projectors, Imprudent Risk takers and Prodigals used money as described by the M-C-M’ and M-M’ equations. Thus, Smith developed Aristotle’s theory while Keynes developed Smith’s theory. Keynes’s speculators and rentiers are Smith’s Projectors, Imprudent Risk takers and Prodigals, which are Aristotle’s users of money explained by the M-C-M’ and M-M’ equations. Smithian and Keynesian economics are best understood as technical developments of Aristotle’s development of Plato (Socrates). Aristotle, Smith and Keynes all linked the macroscopic problems of deflation and inflation, resulting primarily from a constant and repeated series of bubbles, to the behavior of Projectors, Imprudent Risk takers and Prodigals, who had obtained the aid of the private banking system. The problem will continue to repeat indefinitely until the Central Bank is retaken by representatives of the Sober people and the banking policies of 1934-1978 reinstituted with stronger firewalls incorporated to prevent the central bank from ever being captured again by Wall Street, which represents the modern version of Smith’s Projectors, Imprudent Risk takers and Prodigals.
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Correcting Modigliani's 1944 'Liquidity Preference and the Theory of Interest and Money': This Article Dealt with Hicks's Interpretation of Keynes, but not with Keynes's General Theory Model
SSRN Electronic Journal, 2017Co-Authors: Michael Emmett BradyAbstract:F. Modigliani’s 1944 paper, “Liquidity Preference and the Theory of Interest and Money”, aimed at supplying the missing labor market and production function analysis in Hicks’s 1937 Econometrica paper. However, Modigliani ignored the fact that Keynes had already provided exactly that analysis in chapters 20 and 21 of the General Theory to support his own IS LM analysis from chapters 14, pp.180-182 and chapter 15 pp.199-202 and pp.208-209 of the General Theory. F. Modigliani was an advocate of the personalist, psychological, Bayesian Subjectivist approach to Probability of Ramsey, de Finetti, Savage and Friedman. Modigliani was unable to deal with Keynes’s definition of uncertainty in the General Theory, which was that uncertainty was an inverse function of the weight of the evidence, which Keynes analyzed in chapters 6 and 26 of the A treatise on Probability. Uncertainty means that probability and risk estimates can’t be calculated in an accurate and reliable manner. This would mean that the confidence one has in one’s estimates is important. However, all Subjectivist Bayesians argue that there is no such thing as the confidence that a decision maker has in his probability estimates because the probability estimate is his degree of confidence. Therefore, there can be no such variable that measures the confidence that a decision maker has in the relative strength and/or weakness of the relevant evidence upon which the probabilities are being estimated. The state of confidence can’t be accepted as a variable that will be taken into account by a decision maker. Therefore, Liquidity Preference must be a function of risk only. A probability distribution is assumed to be known for certain by all decision maker, so that the expected price level will be a precise, exact determinate number. All of these points were rejected by Keynes in the A treatise on Probability and General Theory. In fact, for Keynes the expected price level is imprecise or indeterminate. Therefore, the expected real wage is imprecise or indeterminate. Modigliani’s subjectivist approach to probability results in Modigliani incorrectly specifying the demand for labor function in Keynes’s General Theory by ignoring Keynes’s definition in the General Theory that the demand for labor curve is a function of the expected real wage and not the actual real wage. The actual real wage, (w/p) can’t be specified precisely because workers and employers only know their nominal money wage, w, for certain. p is expected and can only be represented by an interval estimate form of probability. This will automatically lead to multiple equilibria, only one of which will be consistent with Modigliani’s one, unique, stable full employment equilibrium. Modigliani also erred in explicitly assuming that the theory of the firm-industry used in the General Theory was the Theory of Perfect Competition, so that the expected price level, p, is known for certain based on the assumptions of perfect information and perfect prediction. In fact, Keynes used the theory of Pure Competition and expressly made it clear that there were a number of different expected price levels held with varying degrees of probability and definiteness on p.24 in footnote 3 of the General Theory. There was not only one expected value, as assumed by Modigliani. None of Modigliani’s conclusions regarding Liquidity Preference hold in the Keynesian system analyzed by Keynes in chapters 13-15 and 19-21 of the GT based on uncertainty. Modigliani’s conclusions only hold in his redefined model where risk is substituted for uncertainty, perfect competition is substituted for pure competition, and a known, definite, precise real wage is substituted for Keynes’s expected, imprecise, indeterminate real wage.
Norman C. Miller - One of the best experts on this subject based on the ideXlab platform.
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Towards a loanable funds/amended-Liquidity Preference theory of the exchange rate and interest rate
Journal of International Money and Finance, 1995Co-Authors: Norman C. MillerAbstract:Abstract The objective is to develop a unified theory of the exchange rate and interest rate, using a loanable funds/amended-Liquidity Preference approach, in order to provide a new perspective on many puzzling facts associated with the post Bretton Woods international economy. It is shown that: (i) a monetary expansion can initially raise the interest rate but depreciate the home currency; (ii) real demand shocks can cause interest rate and exchange rate overshooting; (iii) an infinite interest elasticity for capital flows cannot cause exchange rate overshooting if an ‘extended Marshall-Lerner’ condition holds; (iv) the home currency can appreciate when the current account is negative if the extended Marshall-Lerner condition is not satisfied; and (v) changes in the disequilibrium regime will cause instability in the estimates of reduced-form coefficients.
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Cash-in-advance, buffer-stock monetarism, and the loanable funds-Liquidity Preference debate in an open economy
Journal of Macroeconomics, 1992Co-Authors: Norman C. MillerAbstract:In a flexible exchange rate open economy, the dynamics of the interest rate within a loanable funds, LF, or an "amended" Liquidity Preference, LP, model (wherein the latter embodies either "cash-in-advance" or "spillover" considerations) can differ substantially from the dynamics within a traditional LP model. Within the former a debt financed fiscal/investment shock can generate "interest rate overshooting," and thereby create highly volatile asset prices. Also, the LF/amended-LP model provides a new explanation for the change in the short-run response of the interest rate to monetary shocks from negative to positive in the early 1970s; that is, this may have been caused by the switch from fixed to flexible exchange rates.