Thread by @MacRoweNick

If I see one more "heterodox" view on the "orthodox" view on "loanable funds" I'm gonna........well, let me do this short thread, instead of heading back to the lake with my canoe: /1

First, if any view is currently "orthodox" in Macro, it is the New Keynesian/Neo-Wicksellian view.
That is the view held by (most?) central bankers & used to guide policy, and taught in (most?) upper-year & grad macro courses. /2

According to that "orthodox" view:
In the Short Run, the (short-term, safe, nominal) rate of interest is set by the central bank at whatever it wants to set it at (subject to ZLB constraints).
This is a pure Liquidity Preference theory of the rate of interest. /3

"Loanable Funds" don't enter into it at all.
And the money stock is demand-determined at that nominal rate of interest.
And reserves and required reserves (Canada has none) don't matter (except as a tax on money created by commercial banks, if reserves don't pay interest)./4

And the stock of money doesn't matter either, because it is determined by, but does not determine, the rest of the system. You can add or delete M from the model, and it makes no difference to the rest of the model. /5

BUT, that bit about the Central Bank being able to set the rate of interest at whatever it likes only works in the Short Run, if the CB wants to keep inflation on target. /6

If the CB sets the rate of interest *permanently* too high or too low, Aggregate Demand will be permanently too low or too high, and inflation will increasingly diverge below or above target. /7

And that "neutral" (just right in the Long Run) rate of interest is determined by desired saving and investment at "potential" output (when AD is just right to keep inflation on target).
And *that* is a "Loanable Funds" theory of the *"neutral" rate*. /8

Now I think there are problems with that theory. But that's for another day.
But that is what *I* think "orthodox" theory thinks about "Loanable Funds".
What do *you* think "orthodox" theory thinks? /9 & end