Interest rate, liquidity preference and loan funds: a critical analysis of attempts to demonstrate equivalence between the theory of loan funds and preference for liquidity

ABSTRACT

This article presents the attempts to demonstrate the equivalence between loanable funds and liquidity preference theories of interest rate done by Hicks, Lerner, Tsiang and Patinkin in order to show that these attempts were not succeed. That is so because these attempts had started from wrong conceptions about what are the issues under discussion in the debate between loanable funds and liquidity preference theories or because they had misrepresented one or another of both theories. In fact, the attempts done by Hicks and Patinkin disconsider the fact that what was essential in this debate was the mechanism by which saving and investment decisions have influence in the determination of interest rate. On the other hand, the attempts of Lerner and Tsiang misrepresent the relation between saving and investment and the finance motive of demand for money that is supposed by both theories.

KEYWORDS:
Keynesianism; interest rate; history of economic thought; liquidity preference