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The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium

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  • Bibow, Jorg

Abstract

This essay analyses the core proposition of loanable funds theory that changes in technology and time preferences directly and immediately affect interest rates. Applying what may be seen as a generalised financial-buffers approach to the analysis of disequilibrium, we find that loanable funds theory is flawed and should therefore be abandoned. A challenge to the neo-Walrasian general equilibrium approach to monetary theory remains: that of justifying the idea that--by some mechanism--intertemporal prices correctly reflect technology and time preferences. Copyright 2001 by Oxford University Press.

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  • Bibow, Jorg, 2001. "The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 25(5), pages 591-616, September.
    • Handle: RePEc:oup:cambje:v:25:y:2001:i:5:p:591-616
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    Cited by:

    1. Rohwer, Götz & Behr*, Andreas, 2020. "Revenues from Financial Capital. A Formal Framework," MPRA Paper 99306, University Library of Munich, Germany.
    2. Kehrwald, Bernie, 2014. "The Interest Rate in a Monetary Economy," MPRA Paper 102388, University Library of Munich, Germany, revised 12 Aug 2020.
    3. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, University Library of Munich, Germany.
    4. Jorg Bibow, 2000. "On exogenous money and bank behaviour: the Pandora's box kept shut in Keynes' theory of liquidity preference?," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 7(4), pages 532-568.
    5. Yan Liang, 2010. "China and the Global Financial Crisis: Assessing the Impacts and Policy Responses," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(3), pages 56-72, May.
    6. Bofinger, Peter & Ries, Mathias, 2017. "Excess saving and low interest rates: Theory and empirical evidence," CEPR Discussion Papers 12111, C.E.P.R. Discussion Papers.
    7. Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
    8. Giancarlo Bertocco & Andrea Kalajzić, 2023. "A critical analysis of the loanable funds theory: some notes on the non-neutrality of money," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(1), pages 35-55, April.
    9. Fabian Lindner, 2012. "Saving does not finance Investment: Accounting as an indispensableguide to economic theory," IMK Working Paper 100-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Korkut Erturk, 2005. "Speculation, Liquidity Preference and Monetary Circulation," Working Paper Series, Department of Economics, University of Utah 2005_12, University of Utah, Department of Economics.

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