Loanable Funds
The pool of savings available for borrowing, with interest rates set by supply and demand.
What is Loanable Funds?
The loanable funds theory is a classical model that explains how market interest rates are determined by the interaction between the supply of funds available to lend — primarily household savings, business retained earnings, and foreign capital inflows — and the demand for funds from borrowers, including businesses investing in capital, governments running deficits, and households buying homes or consumer goods. When savings increase, the supply of loanable funds rises and interest rates tend to fall; when investment demand or government borrowing rises, demand increases and rates tend to rise. The model explains the crowding-out effect, where government deficits compete with private borrowers for available funds and push up interest rates.
Example
During the 2010s, high saving rates in China and other emerging economies contributed to a global 'savings glut,' increasing the worldwide supply of loanable funds. This surplus pushed real interest rates in developed economies to historic lows, as more capital was available than profitable investments could absorb — a phenomenon documented by former Federal Reserve Chair Ben Bernanke in a 2005 speech.
Source: Federal Reserve — Ben Bernanke: The Global Saving Glut and the U.S. Current Account Deficit