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

Giancarlo Bertocco and Andrea Kalajzić
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Andrea Kalajzić: University of Insubria

Economia Politica: Journal of Analytical and Institutional Economics, 2023, vol. 40, issue 1, No 2, 35-55

Abstract: 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.

Keywords: Natural rate of interest; Bank money; Crises; Schumpeter; Keynes (search for similar items in EconPapers)
JEL-codes: B13 E12 E14 E32 E44 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s40888-022-00286-4

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