ABSTRACT
In the analysis of the previous chapter, asset accumulation by firms was entirely funded in the long-term by issuing equities to savers and all voluntary saving was held in the form of these equities in the economy's capital stock. Both assumptions are too simplistic, since in reality firms also use long-term debt to fund a portion of their assets and households choose to hold at least some of their savings in the form ofliquid money balances. Paul Davidson (1968; 1972) was the first person to analyse the impact of this behaviour on Keynes's theory of the revolving fund of investment finance, and the purpose of this chapter is to integrate Davidson's analysis into the model ofthis book. In particular, Davidson made three alternative assumptions to Keynes that are important in the current study. First he allowed for the possibility that the marginal propensity to buy equities out of household savings might be less than one. Second he recognised that firms might fund some of their investment expenditure directly from retained profits (that is from corporate saving rather than by selling equities to household savers). Third, he allowed firms to choose to fund only a fraction of their investment expenditure externally via the issue of new equities to the public with the rest being funded by long-term debt. l These three considerations are the subject of the first four sections of this chapter before the final section presents the resulting two-period model that will provide the basic framework for the remainder of this book.
