Liquidity preference, loanable funds, and Niall Ferguson (wonkish) - Paul Krug... - The Diigo Meta page

• 11 May 12
  

  donaldab dnvWsdUA

  Joe Nocera writes about Thursday’s New York Revie/PEN event on the economy, but fails to mention what I found the most depressing aspect of the whole thing: further confirmation that we’re living in a Dark Age of macroeconomics, in which hard-won knowledge has simply been forgotten.
  
  What’s the evidence? Niall Ferguson “explaining” that fiscal expansion will actually be contractionary, because it will drive up interest rates. At least that’s what I think he said; there were so many flourishes that it’s hard to tell. But in any case, this is really sad: John Hicks knew far more about this in 1937 than people who think they’re sophisticates know now.
  
  In any case, I thought it might be useful to re-explain why our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy.
  
  
  Here’s what I imagine Niall Ferguson was thinking: he was thinking of the interest rate as determined by the supply and demand for savings. This is the “loanable funds” model of the interest rate, which is in every textbook, mine included. It looks like this:

  Paul Krugman Expansionary Policy Contractionary expansion Fiscal Deficit Fiscal Austerity Fiscal Contraction

• 12 Aug 11
  

  randyfurlong

  Krugman's macroeconomics links

  NYTimes.com Economics

• 13 Jun 11
  

  gerassimos arsenis

  liquidity loanable funds lesson

• 12 Jun 11
  

  Thomas James

  This is the IS curve, taught in Econ 101. Now, we usually explain how this curve is derived in a different way: we say that given the interest rate, you can determine investment demand, and then through the multiplier process this determines GDP. What you’re supposed to understand, however, is that the derivation I’ve just given is just a different way of arriving at the same result. It’s just different presentations of the same model.
  
  So what determines the level of GDP, and hence also ties down the interest rate? The answer is that you need to add “liquidity preference”, the supply and demand for money. In the modern world, we often take a shortcut and just assume that the central bank adjusts the money supply so as to achieve a target interest rate, in effect choosing a point on the IS curve.

  PaulKrugman economics macroeconomics reference liquiditytrap saving savingsglut

• 23 Aug 09
  
• 18 Aug 09
  

  W21st NYC

  Ferguson as poseur liquidity & loans conservative economic myths debunked-austerity

• 07 Jun 09
  

  Martin Kenner

  collapse: Krugman v Ferguson economics

• 14 May 09
  

  Jason Welker

  I thought it might be useful to re-explain why our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy.
  
  Here’s what I imagine Niall Ferguson was thinking: he was thinking of the interest rate as determined by the supply and demand for savings. This is the “loanable funds” model of the interest rate, which is in every textbook, mine included. It looks like this:
  INSERT DESCRIPTION
  
  where S is savings, I investment spending, and r the interest rate.
  
  What Keynes pointed out was that this picture is incomplete if you allow for the possibility that the economy is not at full employment. Why? Because saving and investment depend on the level of GDP. Suppose GDP rises; some of this increase in income will be saved, pushing the savings schedule to the right. There may also be a rise in investment demand, but ordinarily we’d expect the savings rise to be larger, so that the interest rate falls:
  INSERT DESCRIPTION
  
  So supply and demand for funds doesn’t tell you what the interest rate is — not by itself. It tells you what the interest rate would be conditional on the level of GDP; or to put it another way, it defines a relationship between the interest rate and GDP

  economics

• 03 May 09
  

  tony curzon price

  crash

  • Liquidity preference, loanable funds, and Niall Ferguson (wonkish)
• 02 May 09
  

  nspalmer

  Nobel laureate economist Paul Krugman explains why fiscal stimulus will not necessarily drive up interest rates. A good explanation of the relationship between interest rates, savings, investment, and liquidity preference.

  Krugman nytimes economics fiscal policy interest rates savings investment liquidity preference

Would you like to comment?

Join Diigo for a free account, or sign in if you are already a member.