The Demand for Money and the Rate of Interest
Within traditional Keynesian economics money serves as a means of payment and a store of wealth. These two functions of money were used by Keynes to undermine the classical dichotomy between the real and monetary sectors of the economy. The end result was his liquidity preference theory of the demand for money which allowed changes in the monetary sector to be transmitted to the real sector through changes in the rate of interest. But Keynes also assumed, along with everyone else, that the supply of money was exogenously determined. An exogenous money supply is simply another way of saying that the central bank (through its use of open market operations, the discount rate, and reserve requirements) can adjust the overall volume of money, in response to changes in the demand for it, to that level consistent with its policy objectives.
KeywordsInterest Rate Monetary Policy Central Bank Money Supply Finance Motive
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Notes and References
- 1.John Maynard Keynes, A Treatise on Money (London: Macmillan, 1930), Vol. 1, p. 243, original italics. Subsequent quotations are from Volume 1, Chapters 3 and 15.Google Scholar
- 4.See especially, J. A. Kregel, ‘Constraints on the Expansion of Output and Employment: Real or Monetary?’ Journal of Post Keynesian Economics Winter 1984–5.Google Scholar
- 5.See Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975), Chs 2 and 3.Google Scholar
- 6.Michal Kalecki, Selected Essays on the Dynamics of the Capitalist Economy 1939–1970 (New York: Cambridge University Press, 1971), Ch. 5.Google Scholar