Forced saving and forced investment

Wicksell postulates a process of forced saving when the money rate of interest is held below the natural rate, a process that maintains the ex post equality of savings and investment. Keynes turns that situation around, and postulates a process of forced investment (the piling up of inventories) when the money rate is held above the natural rate, a process that again maintains the ex post equality of savings and investment.

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  1. However the mechanism seem quite different and the comparison doesn't hold when you look at things the other way around.

    For Wicksell: Savings and Investment are brought into line by relative price changes. When the interest rate is too low then prices are bid up and consumers, whose incomes have declined in real terms, can't buy as much and this funds the "forced savings". When interest rates are too high consumers can buy more than they planned since prices have fallen and bid good away from investment. They end up saving less than planned so this is really (kind of) forced dis-savings

    Foe Keynes: Savings and investment are brought into line by inventory adjustment. When interest rates are too low then inventories are run down. This is (sort of) forced dis-investment.



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