Money and interest rates

L. Randall Wray ()

Chapter 7 in Understanding Modern Money Theory, 2025, pp 148-174 from Edward Elgar Publishing

Abstract: This chapter presents an alternative to orthodox interest rate theory—that is based on loanable funds theory or the money supply-money demand approach of the ISLM model. The MMT/heterodox alternative integrates Keynes's liquidity preference theory, endogenous money, and the recognition that central banks set the base rate and can try to influence rates across the term structure. They also accept Keynes's demonstration that as investment (and other injections) determines saving (and other leakages), the interest rate must be independent of the level of investment and saving. The chapter also examines Keynes's liquidity preference theory as a theory of value for asset prices and relates this to Minsky's “two price system” approach to the investment decision. Other topics covered include horizontalism, credit rationing, expectations theory, and the mark-up approach. Finally, it distinguishes between money demand as a flow versus a stock concept, and the implication for interest rate determination.

Keywords: Liquidity preference theory; Term structure of interest rates; Interest rate targeting; Loanable funds theory; ISLM; New Monetary Consensus; Credit rationing; Expectations theory; Horizontalism; Minsky's two-price system (search for similar items in EconPapers)
Date: 2025
ISBN: 9781800375147
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