Posted by: Dirk | January 21, 2008

Theories of the interest rate (IV): John Maynard Keynes

This is the beginning of a miniseries on interest rate theories. The aim is to understand the basic idea behind these concepts. It will cover the quantity theory, Wicksell’s natural interest rate, Fisher’s determination of the interest rate, and the concept of the interest rate according to Keynes. Last out, first in:

Here’s an excerpt by Keynes from the General Theory of Employment (the paper, published in the Quarterly Journal of Economics in 1937, p. 216 ff.):

This, expressed in a very general way, is my theory of the rate of interest. The rate of interest obviously measures – just as the books on arithmetic say it does – the premium which has to be offered to induce people to hold their wealth in some form other than hoarded money. The quantity of money and the amount of it required in the active circulation for the transaction of current business (mainly depending on the level of money income) determine how much is available for inactive balances, i.e. for hoards. The rate of interest is the factor which adjusts at the margin the demand for hoards to the supply for hoards.


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