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Suppose that we have an economy where households mostly hold their liquidity as cash under their mattresses. If they suddenly start lending all of it (to construction projects and the like), no matter the interest rate they get in return, what is the effect on prevailing interest rates?

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    $\begingroup$ On what interest rates? Also what does it even mean being forced to lend out high percentage of their assets? How do you lend a % of truck or house? Also what specific artificial restrictions? That actually can change the answer since there might be some second order effects $\endgroup$
    – csilvia
    Commented Nov 30, 2022 at 16:36
  • $\begingroup$ @csilvia In macroeconomics there is only "the" interest rate. See economics.stackexchange.com/questions/51043/… $\endgroup$ Commented Nov 30, 2022 at 16:38
  • $\begingroup$ are you feeling ok today? That is clearly not true. $\endgroup$
    – csilvia
    Commented Nov 30, 2022 at 16:39
  • $\begingroup$ @csilvia Am I on crazy pills? I provided a source on this very site from a respected moderator who works at a central bank as a macroeconomics researcher. And you say it is clearly not true. $\endgroup$ Commented Nov 30, 2022 at 16:39
  • $\begingroup$ lol you literally linked to an answer that says there are multiple interest rates. Ok no point in talking to you. $\endgroup$
    – csilvia
    Commented Nov 30, 2022 at 16:40

2 Answers 2

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When you say “to lend out a high percentage of their assets instead of holding cash” it seems as if you mean “to lend out a high percentage of their cash instead of holding cash”, otherwise the question makes no grammatical sense. Assuming that is the case , then I would say that most households already lend out their cash , by putting it in a bank. That is overnight lending. The remainder of their cash, which might be held in bank notes, doesn’t constitute a large percentage of the monetary assets of most households. So overall I don’t think the question makes much sense. Please correct me if I’m misinterpreting.

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  • $\begingroup$ Yes, this is already happening true in today's world and I am wondering what effect it has on interest rates. $\endgroup$ Commented Dec 9, 2022 at 20:55
  • $\begingroup$ When cash is deposited in a bank then that would tend to drive down interest rates , but this is offset by a central bank that absorbs the cash through either a deposit facility or open market operations, to keep the interest rate at target. $\endgroup$
    – dm63
    Commented Dec 9, 2022 at 23:10
  • $\begingroup$ sounds like the net effect is as if consumers would lend cash directly to the central bank. $\endgroup$ Commented Dec 10, 2022 at 0:49
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If you are talking about cash (when you mean assets), then excess of cash could drive down interest rates, other things being constant. And in your case since it is a law, everyone is interested in giving out their cash on loans, this search for borrowers would be competitive and drive down the interest rate. Again, in an imaginary world, if you do this, it might generate a difference in cash holding patterns in the long run after you introduce the law. How that plays out is hard to say without putting a bit more structure on the model.

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    $\begingroup$ I would say it almost surely drives up interest rates. Most cash is held at bank accounts at very low interest rates. These deposits build a base for loans (among many other things) that banks can use. $\endgroup$
    – AKdemy
    Commented Dec 1, 2022 at 7:02
  • $\begingroup$ Why would more deposits drive up interest rates? It would increase banks base, which in turn would mean that banks lend more. The only way they can lend more is by driving down interest rate on fresh loans. $\endgroup$
    – EndLoop
    Commented Dec 1, 2022 at 11:03
  • $\begingroup$ There wouldn't be more deposits. People already have the vast majority of their cash in bank accounts. What would change is that if you are forced to lend it out directly, your money is tied in loans, and you cannot simply stop the loan at any time. Assume you have $1000 and need USD800 to give someone for a loan (say to buy a mobile phone). If it is agreed to buy back the loan over 2 years, you cannot get the money back tomorrow. However, in a bank deposit (ignoring some savings accounts), you have essentially ON as explained by @dm63. $\endgroup$
    – AKdemy
    Commented Dec 1, 2022 at 11:10
  • $\begingroup$ Since you need to tie your money (for a lot) longer, you would want a higher interest rate. $\endgroup$
    – AKdemy
    Commented Dec 1, 2022 at 11:11
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    $\begingroup$ And what you explain in your last comment is essentially what most (the average person) people do(es). $\endgroup$
    – AKdemy
    Commented Dec 1, 2022 at 16:28

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