I. OBJECTIVES The purpose of this paper is to propose an alternative approach to the standard Keynesian analysis of leakages and injections in macroeconomics. More specifically, we suggest that leakages and injections may be recast within the Classical model with the focus on the bond market and bond prices rather than the product market and the level of real gross domestic product.
II. DATA/METHODS This paper relies on a diagrammatical analysis of the bond or capital market to achieve its objectives. In short, the bond market may be viewed as the mirror image of the real economy. For example, while saving is defined in the Keynesian analysis as a leakage from the income or expenditure stream, it would alternatively be considered from the Classical perspective as an injection into the bond market. In addition, while investment is interpreted as an injection in to the product market by the Keynesian school, it would be depicted by the Classical school as a leakage from the bond market. The analysis is easily extended to include the effects of both the government budget position and the balance of trade.
III. RESULTS/EXPECTED RESULTS Since Samuelson ( 1948 ), the leakages and injections analysis has become quite important at all levels of macroeconomics. However, this methodological perspective and formal analyses is always Keynesian and, therefore focuses on the commodity market where the variable determined by the respective flows is real gross domestic product. Indeed, the approach is so consistently Keynesian that it became known as “hydraulic Keynesianism”. This paper demonstrates in how leakages and injections may be alternatively interpreted and used to focus on the bond market and the determination of bond prices, since in the Classical school the level of real gross domestic product is a function only of input quantity and quality. We show that when injections into the bond market exceed leakages, bond prices will rise and when leakages are greater than injections bond prices will fall. Our results in the hydraulic sense are directly analgous but, in a sense, opposite to the standard Keynesian analysis. For example, while Keynesians interpret a Federal budget deficit as a net injection to the income stream which thus increases real gdp, the Classical approach would view the same deficit as a net leakage from the bond market which would cause bond prices to decrease.