1. Keynes's 'Finance' Demand for Liquidity, Robertson's Loanable Funds Theory, and Friedman's Monetarism
- Author
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S. C. Tsiang
- Subjects
Finance ,Economics and Econometrics ,Ex-ante ,Monetarism ,business.industry ,media_common.quotation_subject ,Loanable funds ,Investment (macroeconomics) ,Interest rate ,Market liquidity ,Cash ,Liquidity preference ,Economics ,business ,media_common - Abstract
Publisher Summary The crucial concession made by Keynes to the critics of his liquidity preference theory of interest rate is his acknowledgment of the so-called finance demand for liquidity, or the demand for finance for planned investment yet to be carried out. Ohlin espoused a Swedish variant of the neoclassical theory and contended that the rate of interest depends on the interaction at the margin between the supply of new credit due chiefly to ex ante savings and the demand for it arising chiefly out of ex ante investment. Ex ante investment is understood to be investment expenditures that are being planned; however, they are not yet carried out. Somewhat symmetrically, ex ante savings are defined as planned savings out of income that is expected to accrue subsequently. Ohlin suggested that the demand for credit or finance for the ex ante investment could be met by the supply of credit provided by ex ante savings. Unfortunately, to make the concept of ex ante savings symmetric to the concept of ex ante investment, Ohlin and his Swedish colleagues defined the former as planned savings out of incomes that are expected to accrue in the future. Keynes was certainly right in saying that the supply of finance must come out of existing cash balances or banks' credit creation. After all, the interest rate must still be determined by the demand for liquidity of money, including the newly recognized demand for finance, and the supply of liquidity, including new liquidity created by banks.
- Published
- 1980
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