Professor Gale’s paper deals with the theory of liquidity preference and interest rates formulated by Hicks in Value and Capital. The main aim of the paper is not to present an interpretation of Hicks’s thinking, but to re-examine, in the context of the modern theory of asset-pricing, some of the problems raised in Part III of Value and Capital. However, Gale points out from the start that, while Hicks’s analysis has been generally viewed as a theory of the term structure of interest rates, there are elements which make it particularly relevant to the problem of allocation of real resources in incomplete markets. Actually, according to Gale, the most important aspect of liquidity preference is that it may cause underinvestment in long- lived capital goods.


Interest Rate Term Structure Full Employment Incomplete Market Short Rate 
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  1. Gale, D. (1982) Money: In Equilibrium (Cambridge: Cambridge University Press).Google Scholar
  2. Hicks, J. R. (1939) Value and Capital (Oxford: Oxford University Press). Leijonhufvud, A. (1968) On Keynesian Economics and the Economics of Keynes (Oxford: Oxford University Press).Google Scholar
  3. Modigliani, F. and Sutch, R. (1966) ‘Innovations in Interest Rate Policy,’ American Economic Review Proceedings, vol. 56, pp. 178–97.Google Scholar
  4. Woodward, S. (1983) ‘The Liquidity Premium and the Solidity Premium,’ American Economic Review, vol. 73, pp. 348–61.Google Scholar

Copyright information

© International Economic Association 1991

Authors and Affiliations

  • Carlo Casarosa
    • 1
  1. 1.University of PisaItaly

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