A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage Under Dynamic Optimization

Posted: 1 May 2006

See all articles by Yoshiyasu Ono

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER)

Abstract

This article is an attempt to formalize Chapter 17 of Keynes's General Theory using a continuous dynamic optimization model with perfect foresight. I Present two subjective interest rates: the time preference rate and the liquidity premuim that, respectively, govern the consumption-saving and portfolio decisions. Under optimal household behavior, they are equalized to the market rate of interest. In the monetary economy described by Keynes, however, the equalitly can be inconsistent with the condition of market equilibrium, in which case persistent stagnation occurs. A new analytic method based on dynamic optimization is proposed as an alternative to IS-LM analysis.

Keywords: interest rates, dynamic optimization, liquidity preference, time preference, persistent stagnation

JEL Classification: E12, E40, B22

Suggested Citation

Ono, Yoshiyasu, A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage Under Dynamic Optimization. International Economic Review, Vol. 42, No. 1, February 2001. Available at SSRN: https://ssrn.com/abstract=899044

Yoshiyasu Ono (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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