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Animal spirits, liquidity-preference and Keynesian behavioural macroeconomics: An intertemporal framework

Koutsobinas, Theodore (2011): Animal spirits, liquidity-preference and Keynesian behavioural macroeconomics: An intertemporal framework.

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Abstract

Abstract The utilization of a real-interest rate rule in Romer’s new-Keynesian IS-MP approach, which is consistent with new synthesis intertemporal baseline macroeconomic models, provides a contemporary alternative to the standard old-Keynesian IS-LM model and moves back the emphasis on general accounts of the macroeconomic process. Despite its merits, the IS-MP approach neglects completely the influence of the liquidity-preference typically associated in pure Keynes framework with the impact of confidence and animal spirits. In the present article, we show how the macroeconomic process takes place in terms of both a real interest-rate rule and liquidity-preference through the yield curve. This new synthesis, which is shown to be consistent with standard intertemporal analysis, proves to be useful not only because it maintains the illustrative advantages of either the old-Keynesian model with respect to liquidity-preference or the new-Keynesian model with respect to the interest-rate rule but also because it can be utilized as an effective communicative tool among different strands of economic thought.

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