An Introduction to the Theory of Interest

An Introduction to the Theory of Interest

An Introduction to the Theory of Interest

An Introduction to the Theory of Interest

Excerpt

The purpose which motivated the choice of subject matter in this study is too ambitious for a single book, and the present work must be viewed as the first step in a larger endeavor. My basic objectives are, first, to provide an understanding of the nature of interest and of the forces determining rates of interest, and second, to consider the implications of these for social policy, especially montary policy.

In his Prosperity and Depression Haberler states that "the theory of interest has for a long time been a weak spot in the science of economics, and the explanation and determination of the interest rate gives rise to more disagreement among economists than any other branch of economic theory." Vera and Friedrich Lutz begin their 1951 "Remarks on the Theory of Interest" with the sentence, "The theory of interest is, at present, in a state of great confusion."

As I have examined my own difficulties with the theory of interest, it has seemed that the quest for clarification might require at least five steps. First, to gain an understanding of the meaning and the degree of validity of the so-called nonmonetary theories of interest, such as those of Boehm-Bawerk and Irving Fisher. Second, to examine contemporary monetary theories, such as the loanable-funds and the liquidity-preference theories, studying their relation to one another and to nonmonetary theories. Third, to recognize the existence not only of one "rate of interest," but of an entire structure of rates, depending upon term to maturity even when there is no risk of nonpayment. Fourth, to take into account the implications of market imperfections, uncertainty, and dynamic elements in relation to the general levels of rates as well as to the term structure. And finally to utilize the results of empirical studies . . .

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