Essays on the theory of liquidity
By: by Yue Tan David Tang
Published: 2009
Language: eng
Number of pages: 64
Description: This Dissertation has three Chapters: In Chapter One, we argue that the current interpretation of Keynes's General Theory , which relies on nominal rigidities to generate involuntary unemployment, is wrong. We trace the development of Keynes's thought. In the Treatise on Money , Keynes offers a dynamic version of the Quantity Theory. His subsequent realization, prompted by Kahn's critique, that he has not allowed the possibility of output as a whole falling short of full capacity, led him to develop a theory of output determination. With output being not fixed, it occurs to Keynes that the Classical Theory of Interest, failing to take into account the feedback from investment to output, is inconsistent; which eventually led him to develop the liquidity-preference theory. It is the conjuncture of these two lines of thought that launched the Keynesian Revolution. We also argue that Hicks's (1937) and Modigliani's (1944) interpretations of the General Theory seriously distorted the message Keynes intended to convey. For Keynes, involuntary unemployment is caused by the money market being not cleared, the rate of interest being sluggish downwards.

In Chapter Two, we offer a number of observations on Ch. 17 of the General Theory . Keynes argues, in that chapter, that the own-rate of interest of money has the tendency to remain so high as to render many investment projects unprofitable, and this for three properties of money: liquidity, near-zero elasticity of production, and near-zero elasticity of substitution. We argue that the crux of the matter lies in the fact that money is the most widely accepted means of payment in limited supply. In Chapter Three, we explore the interaction between liquidity and risk-taking. By way of a simple model, we compare the effect of higher market liquidity and higher cost of holding money balances on the risk undertaken by investors, the expected total return, the amount of money balanced held, and the cash gap in case of a liquidity shock. We find that in some cases, the effect is ambiguous. This result has important implications for the conduct of monetary policy.
Notes: "May 2009."

Thesis (Ph.D., Dept. of Economics)--Harvard University, 2009.

Includes bibliographical references.