Posted by: Dirk | December 31, 2014

Association of German banks: loanable funds theory fails.

The Association of German banks has released a press statement (in German) which is very interesting. According to a survey, Germans keep their wealth in the form of bank deposits at different maturities even though interest rates are low. This empirical fact invalidates neoclassical theory that says that savers save less when interest rates are low and more when interest rates are high. The typical savings schedule is upward-sloping in an interest rate/savings space. In reality, savings do not seem to depend on the interest rate as the amount of savings (income not spend) has not fallen in the last years when interest rates in the euro area went down to zero.

Michael Kemmer, of the association of German banks, is unhappy:

„Wenn die Deutschen weiterhin den größten Teil ihres Geldvermögens auf Giro-, Tages- oder Sparkonten parken bzw. in Form von Bargeld halten, verpassen sie die Chance auf eine höhere und auch nach Abzug der Inflationsrate positive Rendite.“

If Germans continue to park the major part of their monetary wealth in the form of deposits, savings deposits and cash, then they lose the opportunity to achieve a higher (real) yield, he says. Well, that might be true, but then it also might not. Scientist should now abandon the idea that savings fall when interest rates fall and that the supply of savings is low when interest rates are low. It has no empirical credibility. Next, the whole idea that savings finance investment should be abandoned because that is wrong, too.


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