This link has been bookmarked by 8 people . It was first bookmarked on 02 May 2009, by nspalmer.
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23 Aug 09
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14 May 09
Jason WelkerI 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:
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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:
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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 -
03 May 09
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Liquidity preference, loanable funds, and Niall Ferguson (wonkish)
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02 May 09
nspalmerNobel 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
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