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Cambridge Journal of Economics 25:591-616 (2001)
Copyright © 2001 Cambridge Political Economy Society

Article

The loanable funds fallacy: exercises in the analysis of disequilibrium

Jörg Bibow

University of Hamburg, ISTÖ, VMP 5, D-20146 Hamburg, Germany; bibow{at}hermes1.econ.uni-hamburg.de

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.

Key Words: Interest rates • Financial buffers • Loanable funds • Liquidity preference • Financial intermediation


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