J. M. Keynes's Analysis of the Vertical, Horizontal and Normal Ranges of the LM Curve (Liquidity Preference Function) on Pages 207-208 in Chapter 15 of the General Theory
32 Pages Posted: 7 Jun 2018
Date Written: May 22, 2018
J. M. Keynes gave a very detailed analysis of the three different ranges of the LM curve (normal, vertical, horizontal) on pages 207-208 of the General Theory in chapter 15 in the course of his discussions of the problem of Absolute Liquidity Preference in relation to the question of the effectiveness of monetary policy. This analysis dealt with the ineffectiveness of monetary policy once the long run rate of interest had fallen below a range of 2% to 2.5 %. This would correspond to a short term rate of interest of 0% once the various premiums that are added to the short run rate are subtracted from the long run rate.
Hicks also dealt with the problem of the zero bound when the short run rate of interest had fallen to 0 % in his April, 1937 Econometrica paper, but made no mention of such a problem in his June, 1936 Economic Journal article reviewing the General Theory. Unfortunately, he incorrectly referenced pages 200-201 of the General Theory on page 154 in his footnote 5 in his 1937 Econometrica paper as being the supposed foundation for his different treatment of the potential problem of the ineffectiveness of monetary policy once the short run rate of interest had fallen to 0%. There is no such discussion by Keynes of this problem on pages 201-202 of the General Theory. Keynes’s discussion appears on pages 207-208. Hicks’s discussions on pages 153-154, as well as his figures on pp. 153-154 of his Econometrica article, add nothing to Keynes’s technical discussions and real world examples. Only at the very end of Hicks’s paper does he add something original, that was not explicitly mentioned by Keynes in the General Theory. Hicks, in his discussions of a horizontal IS curve range, did make a small unique contribution. Klein ‘s 1947 discussions of a vertical range for the IS curve is also a small contribution to IS-LM.
Keywords: IS-LM, IS-LP (LM), J. Robinson, R. Kahn, Keynes, mathematical illiteracy, A. Robinson, Y=C I, D-Z model
JEL Classification: B10,B12,B14,B16,B20,B22
Suggested Citation: Suggested Citation