Liquidity Preference and Monetary Policy
T HE contention of this paper is that the demand for cash balances is unlikely to be perfectly inelastic with respect to the rate of interest, and that policy conclusions which depend on the assumption that the demand for cash balances is interest-inelastic are therefore likely to be incorrect. First, the relationship between monetary and fiscal policy recommendations and assumptions concerning the interest-elasticity of the demand for cash balances will be examined. Second, the argument of Dr. Clark Warburton, whose Monetary Theory of Deficit Spending implicitly depends on the interest-inelasticity of the demand for cash balances, will be considered. Third, the position of Professor William Fellner, who explicitly makes and defends the same assumption, will be reviewed. It will be held that this assumption leads Professor Fellner into a theoretical dilemma which can be escaped only by abandoning the assumption, and that Professor Fellner's reasons for believing the demand for cash balances to be interestinelastic are inadequate. Finally, a statistical relationship between the demand for cash balances and the rate of interest will be presented; this relationship, though admittedly not conclusive, is difficult to reconcile with the hypothesis that the demand for cash balances is interest-inelastic.
- DOI
- 10.2307/1927887
- Volume
- 29 (2)
- Pages
- 124
- Export
- BibTeX
- Sources
- crossref openalex