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Journal Article

The loanable funds fallacy: exercises in the analysis of disequilibrium

Jörg Bibow
Cambridge Journal of Economics
Vol. 25, No. 5 (September 2001), pp. 591-616
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/23600473
Page Count: 26
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The loanable funds fallacy: exercises in the analysis of disequilibrium
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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.

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