Table of Contents

Keynes and Macroeconomics After 70 Years

Keynes and Macroeconomics After 70 Years

Critical Assessments of The General Theory

Edited by L. Randall Wray and Matthew Forstater

In this substantial new collection, esteemed Post-Keynesian scholars reassess the relevance of Keynes’s The General Theory to a broad array of topic areas, ranging from the environment, investment finance, exchange rates, and socialism, as well as inquiries into general Post-Keynesian theory.

Chapter 18: Monetary and Fiscal Policies in a Post Keynesian Stock-flow Consistent Model

Edwin Le Heron

Subjects: economics and finance, post-keynesian economics

Extract

18. Monetary and fiscal policies in a Post Keynesian stock–flow consistent model* Edwin Le Heron LIQUIDITY PREFERENCE AND ENDOGENOUS MONEY: A RECONCILIATION The theoretical approach of this chapter seems unrealistic, nevertheless, we shall attempt to reconcile in a model: (i) the liquidity preference theory with its endogenous interest rate (Keynes, 1936 [1973]: ch. 13; 1937), which focuses on the money stock and (ii) the endogenous money of effective demand with an exogenous interest rate (Keynes, 1936 [1973]: ch. 3; and the horizontalist approach of Kaldor, 1985 and Moore, 1988), which focuses on the money flow. Our solution generalizes the liquidity preference theory to the commercial bank sector, distinguishes the determination of the short- and the long-run interest rate, and analyzes the dynamic of flows and stocks in a Post Keynesian model. In Keynes’s General Theory and in the IS–LM model, the ‘monetary authorities’ should resolve all the problems regarding the creation and control of money. The banking system is analyzed solely in terms of central bank activities: the supply of money is fixed exogenously by the central bank. An endogenous theory of the demand for money coexists with an endogenous theory of the interest rate (liquidity preference). But many Post Keynesians prefer to think of an endogenous money supply, determined by the demand for funds in the banking sector. They then use an exogenous theory of the short-term interest rate fixed by the monetary policy. This ‘horizontalist’ approach views banks as intermediaries between the central bank, which...

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