Time-Preference Theory Of Interest

DEFINITION of 'Time-Preference Theory Of Interest'

A theory that examines the nature of consumerism, and the factors that influence consumers to delay current consumption or expenditures in anticipation of greater future returns. The rate of time preference itself can be quantified as the amount of money required to compensate the consumer for foregoing current consumption. This theory also attempts to tie interest rates into the equation by comparing the perceived value of expected future returns with the rate of interest paid on current savings.

BREAKING DOWN 'Time-Preference Theory Of Interest'

This theory was initially constructed in 1871 by Carl Menger, an Austrian economist. This theory also stipulates that the consumer's rate of time preference, and therefore the interest required, will probably rise as the consumer's savings increase. This means that the consumer is likely to restrict his or her savings to a level at which the rate of time preference equals the rate of interest paid on savings.

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