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ASSET PRICE BUBBLES, LIQUIDITY PREFERENCE AND THE BUSINESS CYCLE
Author(s) -
Erturk Korkut A.
Publication year - 2006
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.2006.00241.x
Subject(s) - liquidity preference , economics , business cycle , interest rate , market liquidity , keynesian economics , capital asset pricing model , money supply , monetary economics , financial economics
In his Treatise on Money , Keynes relied on two different themes to argue that the interest rate need not rise with rising levels of expenditure. One of these was the elasticity of the money supply, and the other was the interaction between financial and industrial circulation. A decrease (increase) in what Keynes called the bear position was similar in its impact to that of a policy‐induced increase (decrease) in the money supply. In the General Theory , this second line of argument lost much of its force as it became reformulated under the rubric of Keynes liquidity preference theory of interest. Assuming that the expected return on capital adjusts to the interest rate in short‐period equilibrium, Keynes ignored the effect of bull or bear sentiment in equity markets as a second‐order complication that can be ignored in analyzing the equilibrium level of investment and output. The objective of this paper is to go back to this old theme from the Treatise and underscore its importance for Keynesian theory of the business cycle.