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The independence of finance from saving: A flow-of-funds interpretation

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  • Andrea Terzi

    (Franklin College Switzerland)

Abstract

Keynes's proposition that consumption-and-saving decisions on the part of the public exert no direct influence on the conditions of finance faced by investors contrasts with the loanable funds theory claim that a public's shift from consumption to saving with the purpose of purchasing securities generates an excess supply of funds that eases conditions in the capital market. This paper provides a simple kind of flow-of-funds model where the flow of savings on the part of households, even when it is entirely directed to the purchase of securities, is not a net component of the supply of funds in the capital market. Thus, Keynes's proposition about the independence of finance from saving does not require the assumption of a hidden increase in liquidity preference. Rather, it is based upon a specific conception of the finance process in a monetary economy.

Suggested Citation

  • Andrea Terzi, 2004. "The independence of finance from saving: A flow-of-funds interpretation," Macroeconomics 0405017, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0405017
    Note: Type of Document - pdf; pages: 10. letter format
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    File URL: http://econwpa.repec.org/eps/mac/papers/0405/0405017.pdf
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    References listed on IDEAS

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    1. Victoria Chick, 1983. "Macroeconomics after Keynes: A Reconsideration of the General Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530457, January.
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    Cited by:

    1. Jorg Bibow, 2005. "Liquidity Preference Theory Revisited: To Ditch or to Build on It?," Economics Working Paper Archive wp_427, Levy Economics Institute.
    2. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, EconWPA.
    3. Hein, Eckhard, 1994. "Investition, Finanzierung und Sparen: einige Implikationen der Keynes-Robertson-Kontroverse Ă¼ber den "Revolving Fund"
      [Investment, finance and saving: some implications of the Keynes-Robe
      ," MPRA Paper 19322, University Library of Munich, Germany.
    4. Giovanni Cesaroni, 2001. "The finance motive, the Keynesian theory of the rate of interest and the investment multiplier," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 8(1), pages 58-74.
    5. Martin H. Wolfson, 1993. "Corporate Restructuring and the Budget Deficit Debate," Eastern Economic Journal, Eastern Economic Association, vol. 19(4), pages 495-520, Fall.

    More about this item

    Keywords

    Flow-of-funds model; Keynesian theory; Finance and saving;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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