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Effects on the Prime Interest Rate in Keynesian Models of Loanable Funds and M1

In: Why Fiscal Stimulus Programs Fail, Volume 1

Author

Listed:
  • John J. Heim

    (State University of New York)

Abstract

This chapter examines the relationship variation in the prime interest rate to variation in M1. In Taylor Rule models, M1 was not significant in most periods sampled. But it may be because the inflation variable in Taylor models is already affected by M1; hence adding it separately may be redundant, and the reason it is found insignificant. We show that even though loanable funds and M1 are significantly related, and M1 and the prime rate are also significantly related, that it is possible the regression of loanable funds on the prime rate will be insignificant because both relationships, though significant, have low R2s, but that doesn’t mean they are not linked. It just means that many other factors affect them, too. By comparison, Keynesian models show significant liquidity effects and, after a lag, inflation effects of a change in M1 on interest rates are found in all time periods sampled. The same was true for total LF and its two parts.

Suggested Citation

  • John J. Heim, 2021. "Effects on the Prime Interest Rate in Keynesian Models of Loanable Funds and M1," Springer Books, in: Why Fiscal Stimulus Programs Fail, Volume 1, chapter 0, pages 507-513, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-65675-1_24
    DOI: 10.1007/978-3-030-65675-1_24
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    More about this item

    Keywords

    M1; Money supply; Inflation; Loanable funds; Interest rates;
    All these keywords.

    JEL classification:

    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration

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