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.
KeywordsInterest Rate Term Structure Full Employment Incomplete Market Short Rate
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