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A critical analysis of the loanable funds theory: some notes on the non-neutrality of money

Author

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  • Giancarlo Bertocco

    (University of Insubria)

  • Andrea Kalajzić

    (University of Insubria)

Abstract

The loanable funds theory is at the core of the mainstream monetary theory and of the theoretical model used in the decision-making process of the central banks of advanced economies within the framework guiding their monetary policy decisions. The objective of this work is to show that the loanable funds theory (LFT), which is based on the concept of natural rate of interest, is valid only in economies characterized by the production of a single good, and by the definition of phenomena such as savings and investments in terms of quantities of the only good produced. Following the lesson of Keynes and Schumpeter, we will show that the LFT does not hold in economic systems, such as contemporary economies, based on the use of bank money and on a process of economic development marked by the introduction of innovations consisting in the production of new goods.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:epolit:v:40:y:2023:i:1:d:10.1007_s40888-022-00286-4
    DOI: 10.1007/s40888-022-00286-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Natural rate of interest; Bank money; Crises; Schumpeter; Keynes;
    All these keywords.

    JEL classification:

    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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