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Interest Theory

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Jargon posted on Mon, Mar 4 2013 4:18 PM

What is the most popular theory of interest in mainstream academia today? Or is there one?

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noncognitivism.

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Define interest theory

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Raoul replied on Mon, Mar 4 2013 5:17 PM

I'm not sure to be up-to-date, but I would say:

1° A theory centered around the loan market ;

2° A theory which identifies two "causes" in the formation of the rate of interest, i.e., from the lender's side, the time preference, and from the borrower's side, something like "the marginal efficiency of capital" ;

3° A theory which doesn't really try to define the "essence" of interest. For example, I'm currently reading Hal Varian's intermediate textbook (Ok, it's just a textbook), and I have been amazed by the fact that in his chapter about interest the author doesn't seek at all to explain what "is" the interest.

Not a native speaker - you may correct my spelling errors.
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@Neo

What the nature of lending at interest is. As in, time preference, productivity of capital, labor, exploitation, Keynes' monetary phenomenon, etc. I just want to know what the dominant paradigm is.

@Raoul

So it sounds like the dominant paradigm is that interest is determind by both time preference and the marginal productivity of capital?

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In a modern neoclassical model, the interest rate is determined by both technical factors and time preference. Although some neoclassical economists may have a theory of interest, in the literature It depends on what is in the model.

For example, in a specific model of innovation and R & D, r=η/(ε − 1)*L , where η is related to the productivity of research, L is related to labor supply, and ε is the elasticity of consumer demand. In this case, although there is time preference in the model, the usual subjective factors do not affect the rate of interest.

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ziragt:

For example, in a specific model of innovation and R & D, r=η/(ε − 1)*L ,, where η is related to the productivity of research, L is related to labor supply, and ε is to elasticity of consumer demand. In this case, although there is time preference in the model, subjective factors do not affect the rate of interest.

 

Thanks for the response. Could you elaborate on this a little bit?

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ziragt replied on Fri, Mar 8 2013 10:16 AM

I'll try to clarify. The model I hinted at was just a very specific example, based on what I've been working on recently, so none of the details should be taken very seriously.

In this macroeconomic model, although there is a specific time preference parameter, which more or less correlates with the Austrian concept of pure time preference,  it plays no (direct) role in determining the interest rate. This will probably not be true in most other models.

The point is just that modern theory is very eclectic when it comes to the origins of interest rates.

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Weird

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