The independence of finance from saving: A flow-of-funds interpretation

Andrea Terzi ()

Macroeconomics from EconWPA

Abstract: Keynes's proposition that consumption-and-saving decisions on the part of the public exert no direct influence on the conditions of finance faced by investors contrasts with the loanable funds theory claim that a public's shift from consumption to saving with the purpose of purchasing securities generates an excess supply of funds that eases conditions in the capital market. This paper provides a simple kind of flow-of-funds model where the flow of savings on the part of households, even when it is entirely directed to the purchase of securities, is not a net component of the supply of funds in the capital market. Thus, Keynes's proposition about the independence of finance from saving does not require the assumption of a hidden increase in liquidity preference. Rather, it is based upon a specific conception of the finance process in a monetary economy.

Keywords: Flow-of-funds model; Keynesian theory; Finance and saving (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-mfd
Date: 2004-05-15
Note: Type of Document - pdf; pages: 10. letter format
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0405017

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