Critical Assessments of The General Theory
Edited by L. Randall Wray and Matthew Forstater
Chapter 13: Investment Finance and Financial Sector Development
13. Investment ﬁnance and ﬁnancial sector development Bokhyun Cho* INTRODUCTION Keynes emphasized that the amount of real investment is the most important factor for determining the level of and the change in output and employment, and investment decision making and ﬁnance is mainly inﬂuenced by the activities in the ﬁnancial sector. Although Keynes’s argument sometimes involved debates, the arguments have been strengthened and developed by Post Keynesian economists. Post Keynesians, following Keynes, argue that the expectation formation and liquidity preference under uncertainty in the ﬁnancial sector have an important inﬂuence on the investment ﬁnance and investment decision making in the real sector. Banks control the amount and terms of money supply required for investment according to their liquidity preference. Financial markets inﬂuence the level of and the change in investment through their daily revaluation of investment project’s prospective yield. Post Keynesians, however, hardly discussed the eﬀects of structural development of the ﬁnancial sector on the change in expectation formation and liquidity preference in the ﬁnancial sector, and hence on the investment ﬁnance and investment decision making.1 A deeper investigation of the dynamics of the ﬁnancial sector, therefore, is necessary in order to assess the workings of contemporary ﬁnancial sector development and to search for a better ﬁnancial system in line with Keynes’s principle of eﬀective demand. This chapter aims to analyze the eﬀects of the development of the ﬁnancial sector on the changes in investment ﬁnance and investment decision making. We shall argue that...
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