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Central Bank’s power versus the tyranny of financial markets: liquidity preference and macroeconomic dynamics in a world of endogenous money

Central Bank’s power versus the tyranny of financial markets: liquidity preference and macroeconomic dynamics in a world of endogenous money

Missaglia, Marco and Botta, Alberto ORCID: 0000-0001-9464-8251 (2021) Central Bank’s power versus the tyranny of financial markets: liquidity preference and macroeconomic dynamics in a world of endogenous money. [Working Paper] (Unpublished)

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Abstract

In this paper we build a simple Keynesian model on the role of liquidity preference in the determination of economic performance. We postulate, for the sake of the argument, a purely “horizontalist” environment, i.e., a world of endogenous money where the central bank is able to fix the interest rate at a level of its own willing. In the paper, we show that even in a purely "horizontalist" framework the Keynesian theory of liquidity preference, while obviously not constituting anymore a theory for the determination of the interest rate, continues to be a fundamental piece of theory for the determination of both the level and evolution over time of aggregate income and capital accumulation. We show how households’ liquidity preference (financial markets’ behaviour) and banks’ policy of profits’ distribution interact with each other to determine real macroeconomic outcomes. However powerful, the banking system and monetary authorities are not the deus ex-machina of our economies and financial markets are likely to exert a permanent influence on our economic destiny. We finally draw some policy implications in line with Minsky’s emphasis about the changing role of monetary authorities in ensuring financial markets’ stability in “money-managers” capitalism.

Item Type: Working Paper
Uncontrolled Keywords: Liquidity preference, endogenous money, finance dominance,
Subjects: H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Last Modified: 22 Jul 2021 13:59
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None
URI: http://gala.gre.ac.uk/id/eprint/33405

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