The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium

Jörg Bibow

Cambridge Journal of Economics, 2001, vol. 25, issue 5, 591-616

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.

Date: 2001
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