Alternative theories of the rate of interest

Abstract

In this paper I shall develop a framework which may be used to examine several alternative theories of the rate of interest. The four most widely accepted approaches are the Neo classical Loanable Funds, Keynes's Liquidity Preference, Neoclassical Synthesis ISLM, and Basil Moore's Horizontalist (or endogenous money). I will use the framework developed here to present a fifth: an integration of liquidity preference theory with an endogenous money approach. I first briefly set forth the primary alternative approaches, then develop an analytical framework based on an asset or stock approach and use it to discuss several theories of the interest rate: those advanced by Keynes, by Moore, by neoclassical theory and the monetarists, by Kregel, and by Tobin. Finally, I shall use the framework to reconcile liquidity preference theory with an endogenous money approach.