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

Listed author(s):
  • Andrea Terzi

    (Franklin College Switzerland)

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.

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Paper provided by EconWPA in its series Macroeconomics with number 0405017.

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Length: 10 pages
Date of creation: 15 May 2004
Handle: RePEc:wpa:wuwpma:0405017
Note: Type of Document - pdf; pages: 10. letter format
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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, July.
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