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THE INTEREST ELASTICITY OF MONEY DEMAND, LIQUIDITY AND REVERSE CAUSATION
Author(s) -
LIEBERMAN CHARLES
Publication year - 1979
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1979.tb00546.x
Subject(s) - economics , monetarism , demand deposit , monetary economics , endogenous money , causation , monetary policy , money supply , interest rate , keynesian economics , speculative demand , liquidity trap , demand for money , macroeconomics , market liquidity , liquidity risk , political science , law
This paper employs theoretical neoclassical and Keynesian models which have been expanded to include near monies to demonstrate that the interest elasticity of money demand is a peripheral issue to more fundamental differences between monetarists and Keynesians. The analysis indicates that the money supply is endogenously determined by income in such models, i.e. the reverse causation argument applies, and money is therefore an inappropriate instrument of monetary policy. The analysis also reveals that necessary and sufficient conditions for fiscal policy to be impotent are that the interest elasticities of money demand, money supply and all near monies must be zero.