Natural Rate and Market Rate of Interest
The terms ‘natural rate’ and ‘market rate’ of interest were introduced by Wicksell (1898, 1906) to denote an equilibrium value and the actual value of the real rate of interest. Wicksell applied these concepts to explain the inter-equilibrium movement of money and prices using the hypothesis of maladjustments in the interest rate. Wicksell’s work made the nexus between money creation, intertemporal resource allocation disequilibrium and movements in money income the dominant theme in macroeconomics for three decades. However, Keynes’s conclusions over the saving–investment problem in the General Theory led to the abandonment of the concept of ‘natural’ rate of interest.
KeywordsCredit Cumulative processes Fiat money Forced saving Hayek, F. A. von Inflation Inflation targeting Inside money Intertemporal resource allocation IS–LM model Keynes, J. M. Liquidity preference Loanable funds Monetarism Money supply National income Natural rate and market rate of interest Neutrality of money New classical macroeconomics Overinvestment Quantity theory of money Saving–investment coordination Stockholm School Unemployment equilibrium Wage rigidity Wicksell, J. G. K.
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