Keynes' Measuring Rod for Investment Policy

Abstract

The Keynes Archive at King’s College, Cambridge contains a short, undated Note, A Measuring Rod for Investment Policy, most likely drafted in 1935–6, in which Keynes proposed using a Fixed Interest Index for performance measurement purposes. Starting from the position that the ultimate objective of normal institutional investment was to purchase a reasonably secure annual income, he considered the investment problem of an institution that held a non–Fixed Interest portfolio with the aim of making a profitable switch to Fixed Interest subsequently by being able to buy a larger annual income. Keynes’ proposed criterion being terminal capital value, the switch would be made if the non–Fixed Interest portfolio had the higher market value at the decision date. In this paper, we discuss Keynes’ proposal, identifying conditions under which a consistent conclusion can be drawn, illustrating the discussion using data on two major UK asset market Indices (the Over 15 Year Gilts and the All–Share) over the period 1990–2019.

Keywords: J. M. Keynes, Investment Policy, Measuring Rod

JEL Classification: G10, G11, G20