Of Interest: Theory

Different schools of thought provide varying perspectives on why we pay for the use of money:

: Posits that the interest rate is an equilibrium point where the supply of savings (from households) meets the demand for investment (from firms). It views interest as a "reward for waiting" or abstinence from immediate spending.

: Adjustments to protect the lender’s purchasing power against rising prices. Theory of Interest

: Argues that interest is not a reward for saving, but a reward for parting with liquidity . According to John Maynard Keynes , people prefer holding cash for its safety and flexibility; interest is the premium required to convince them to hold less-liquid assets like bonds.

: Extra compensation for the possibility that the borrower may default. Different schools of thought provide varying perspectives on

: The baseline compensation for the time value of money, often based on government securities.

: An extension of the classical view that includes bank credit and "dishoarding" (releasing idle cash) as part of the supply, treating interest as the price determined by the total supply and demand for loanable funds. : Argues that interest is not a reward

: The overhead required to manage and service the loan. Key Applications Theories of Interest