The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Natural Rate and Market Rate of Interest

  • Axel Leijonhufvud
Reference work entry


The terms ‘natural rate’ and ‘market rate’ of interest were introduced by Wicksell (1898, 1906) to denote an equilibrium value and the actual value of the real rate of interest. Wicksell applied these concepts to explain the inter-equilibrium movement of money and prices using the hypothesis of maladjustments in the interest rate. Wicksell’s work made the nexus between money creation, intertemporal resource allocation disequilibrium and movements in money income the dominant theme in macroeconomics for three decades. However, Keynes’s conclusions over the saving–investment problem in the General Theory led to the abandonment of the concept of ‘natural’ rate of interest.


Credit Cumulative processes Fiat money Forced saving Hayek, F. A. von Inflation Inflation targeting Inside money Intertemporal resource allocation IS–LM model Keynes, J. M. Liquidity preference Loanable funds Monetarism Money supply National income Natural rate and market rate of interest Neutrality of money New classical macroeconomics Overinvestment Quantity theory of money Saving–investment coordination Stockholm School Unemployment equilibrium Wage rigidity Wicksell, J. G. K. 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Cassel, G. 1928. The rate of interest, the bank rate, and the stabilization of prices. Quarterly Journal of Economics 42: 511–529.CrossRefGoogle Scholar
  2. Hayek, F.A. 1931. Prices and production. London: Routledge & Kegan Paul.Google Scholar
  3. Humphrey, T.M. 1986. Cumulative process models from Thornton to Wicksell. Federal Reserve Bank of Richmond Economic Review 18–25.Google Scholar
  4. Keynes, J.M. 1930. A treatise on money, 2 vols. London: Macmillan.Google Scholar
  5. Keynes, J.M. 1936. The general theory of employment, interest and money. London: Macmillan.Google Scholar
  6. Leijonhufvud, A. 1981. The Wicksell connection. In Information and coordination, ed. A. Leijonhufvud. New York: Oxford University Press.Google Scholar
  7. Lindahl, E. 1939. Studies in the theory of money and capital. New York: Holt, Rinehart & Winston.Google Scholar
  8. Myrdal, G. 1939. Monetary equilibrium. Edinburgh: William Hodge.Google Scholar
  9. Palander, T. 1941. On the concepts and methods of the Stockholm school. In International economic papers, vol. 3. London: Macmillan, 1953.Google Scholar
  10. Robertson, D.H. 1926. Banking policy and the price level. New York: Augustus M. Kelley, 1949.Google Scholar
  11. Taylor, J.B. (ed.). 1999. Monetary policy rules. Chicago: University of Chicago Press.Google Scholar
  12. Wicksell, K. 1898. Interest and prices. New York: Augustus M. Kelley, 1962.Google Scholar
  13. Wicksell, K. 1906. Lectures on political economy, vol. 2. London: Routledge & Kegan Paul, 1934.Google Scholar
  14. Woodford, M. 2003. Interest and prices: Foundations of a theory of monetary policy. Princeton: Princeton University Press.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Axel Leijonhufvud
    • 1
  1. 1.