A Backward Bending Supply of Loanable Funds: An Examination of the Interest Rate Elasticity of Saving

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Undergraduate Economic Review, Vol: 11, Issue: 1, Page: 2

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Doehr, Rachel M, Ms.
loanable funds market; interest rate elasticity of saving; target saving; saving rate; backward bending supply curve; Behavioral Economics; Finance; Macroeconomics
article description
The market for loanable funds is presented as either a market with an upward sloping supply curve, or as one with a perfectly inelastic supply. This paper relates the supply of loanable funds to the supply curve in the labor market: backward bending. Once interest rates are high enough, people start to save less, creating the "backward bend.” This explains the discrepancies in previous literature that attempted to put a single value on the interest rate elasticity saving. The reason for the variation in values could be because the elasticity actually depends on the point on the curve.