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Evidence on Stabilising Speculation: Leijonhufvud on Keynes

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Inflation, Institutions and Information

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Abstract

One focus of Leijonhufvud’s work is the interaction of expectation and speculation. In his understanding of Keynes, for example, speculators transmit real shocks to aggregate demand to movements in real variables by not allowing ‘the’ (real) interest rate to adjust to its new long-run equilibrium value.1 A fall in the investment schedule, accompanied by a fall in the business sector’s excess supply of bonds, puts upward pressure on bond prices (downward pressure on bond yields and interest rates). Instead of the interest rate falling to keep the level of aggregate demand equal to the full-employment level of aggregate supply, deficient aggregate demand arises because speculators keep the interest rate close to the initial level that is now too high. Speculators cause this problem, not out of perversity, but because they expect the current downward pressure on bond yields soon to reverse; they act on these beliefs in an attempt to profit. Similarly, speculators play a key role in determining the nominal (and real2) exchange rate.

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Authors
  1. Richard Sweeney
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Editor information

Editors and Affiliations

  1. University of Uruguay, Uruguay

    Daniel Vaz (Professor of Economics) (Professor of Economics)

  2. The Queen’s University of Belfast, Ireland

    Kumaraswamy Velupillai (Professor of Economics and Senior Research Fellow) (Professor of Economics and Senior Research Fellow)

  3. Statistics Norway, Norway

    Kumaraswamy Velupillai (Professor of Economics and Senior Research Fellow) (Professor of Economics and Senior Research Fellow)

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© 1996 Daniel Vaz and Kumaraswamy Velupillai

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Sweeney, R. (1996). Evidence on Stabilising Speculation: Leijonhufvud on Keynes. In: Vaz, D., Velupillai, K. (eds) Inflation, Institutions and Information. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-13521-9_11

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