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Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory


  • Fabian Lindner


The paper presents a critique of loanable funds theory by using simple accounting relationships. It is shown that many economists identify saving and the credit supply by interpreting the macroeconomic saving-investment identity as a budget constraint. According to that interpretation, more saving through lower consumption (and government spending) leads to a higher supply of credit and thus more funds to be invested by firms for investment. The paper shows that proponents of this theory commit accounting fallacies or need very strong and somewhat peculiar assumptions for their theory to hold. In the first step, the concepts of \saving" and \credit" will be clearly distinguished using simple accounting. It will be shown that credit is not limited by anybody's saving and that no one has to abstain from consumption in order for a credit to be provided. Also, it will be shown that financial saving (an increase in net financial assets) through a reduction in expenses reduces other economic units' ability to spend and save. The identification of saving and the provision of credit is likely to stem from the invalid application of neoclassical growth models to a monetary economy. In those models, there are either only tangible assets, so that no coordination failures in financial saving can occur, or in those models real goods are lent and borrowed, not money.

Suggested Citation

  • Fabian Lindner, 2013. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," IMK Working Paper 120-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:120-2013

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    References listed on IDEAS

    1. Giuseppe Fontana, 2003. "Post Keynesian Approaches to Endogenous Money: A time framework explanation," Review of Political Economy, Taylor & Francis Journals, vol. 15(3), pages 291-314.
    2. Bibow, Jorg, 2001. "The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium," Cambridge Journal of Economics, Oxford University Press, vol. 25(5), pages 591-616, September.
    3. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    4. Viral V. Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09," NBER Working Papers 16079, National Bureau of Economic Research, Inc.
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    6. International Monetary Fund, 2010. "European Financial Linkages; A New Look At Imbalances," IMF Working Papers 10/295, International Monetary Fund.
    7. Lindner Fabian, 2013. "Can Germany be an Example for the Crisis Countries?," Economia & lavoro, Carocci editore, issue 3, pages 151-162.
    8. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    9. Fernando J. Cardim de Carvalho, 2012. "Aggregate savings, finance and investment," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 9(2), pages 197-214.
    10. M. G. Hayes, 2010. "The loanable funds fallacy: saving, finance and equilibrium," Cambridge Journal of Economics, Oxford University Press, vol. 34(4), pages 807-820.
    11. Naples, Michele I & Aslanbeigui, Nahid, 1996. "What Does Determine the Profit Rate? The Neoclassical Theories Presented in Introductory Textbooks," Cambridge Journal of Economics, Oxford University Press, vol. 20(1), pages 53-71, January.
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    13. Thomas I. Palley, 1996. "The Saving-Investment Nexus: Why it Matters and How it Works," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 1996-01, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
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    16. Fabian Lindner, 2013. "Banken treiben Eurokrise," IMK Report 82-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    17. Hans-Werner Sinn, 2010. "Euro-Krise: Die Bedeutung des Gewährleistungsgesetzes für Deutschland und Europa," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 63(10), pages 03-09, May.
    18. Viral V Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 37-73, August.
    19. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
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    Cited by:

    1. Walter Buhr, 2018. "Institutional Economics: A Sketch of Economic Growth Policy," Volkswirtschaftliche Diskussionsbeiträge 183-18, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    2. Jakab, Zoltan & Kumhof, Michael, 2015. "Banks are not intermediaries of loanable funds – and why this matters," Bank of England working papers 529, Bank of England.
    3. Marc Lavoie, 2014. "A comment on ‘Endogenous money and effective demand’: a revolution or a step backwards?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(3), pages 321-332, July.
    4. Claudio Borio & Piti Disyatat, 2015. "Capital flows and the current account: Taking financing (more) seriously," BIS Working Papers 525, Bank for International Settlements.
    5. Ponomarenko, Alexey A. & Ponomarenko, Alexey N., 2017. "What do aggregate saving rates (not) show?," Economics Discussion Papers 2017-96, Kiel Institute for the World Economy (IfW).
    6. Claudio Sardoni & Antonio Bianco, 2017. "Banking theories and Macroeconomics," Working Papers 3/17, Sapienza University of Rome, DISS.
    7. Severin Reissl, 2015. "The return of black box economics - a critique of Keen on effective demand and changes in debt," IMK Working Paper 149-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Fabian Lindner, 2014. "Haben die knappen Weltersparnisse die US-Immobilienblase finanziert?," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 40(1), pages 33-61.
    9. Pesenti, Amos, 2015. "The origin of inflation in a domestic bank-based payment system," FSES Working Papers 457, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    10. Bofinger, Peter & Ries, Mathias, 2017. "Excess saving and low interest rates: Theory and empirical evidence," CEPR Discussion Papers 12111, C.E.P.R. Discussion Papers.
    11. Sergio Cesaratto, 2017. "Beyond the traditional monetary circuit: endogenous money, finance and the theory of long-period effective demand," Department of Economics University of Siena 757, Department of Economics, University of Siena.
    12. Kehrwald, Bernie, 2014. "The Excess Demand Theory of Money," MPRA Paper 57603, University Library of Munich, Germany.

    More about this item


    Saving; Wealth; Investment; Production; Financial Markets;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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