[Pen-l] Patnaik on liquidity trap type 1 and type 2

[Gernot Koehler <gko15@xxxxxxxxxxx>]

Reference: Prabhat Patnaik, online at MRzine 21apr09, "Excessive Liquidity Preference"

This is a very interesting article with some good new theory. Stiglitz and Patnaik are of the opinion that the theory of the liquidity trap needs be extended, so that there is the old Keynesian concept of liquidity trap ("narrow concept") and a new (broad) concept of liquidity trap. The old Keynesian concept refers to demand for money "by the public". The new Stiglitz-Patnaik concept refers to demand for money by the public "and also by the banks".
        Using this approach, Patnaik argues that bailing out the banks will not crank up effective demand in the real economy. Practical conclusion: "Government expenditure on goods and services financed by borrowing constitutes the real antidote to excessive liquidity preference."
       (He does not mention it, but one can only hope that those government expenditures on goods and services would not be military (as in WWII under Roosevelt or Hitler), but rather environmental (as under Ehrbar, if he were president).)
Gernot Koehler

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