Re: Interest Rates, Inflation, Exchange Rates and Credit in Bull And Bear Markets

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

On Fri, 1 Dec 2000, Henry C.K. Liu wrote:
> Yet many astute economists insist that high interest rate causes
> inflation, at least in the long run.


Actually I cannot think of any astute economists
who claim this.  The point made by some
structuralists---that higher interest rates work
as a negative supply shock---is quite different:
it is not a source of sustained inflation.

If you wish to understand why a country has
experienced over a sustained period of time annual
25% inflation and 35% interest rates, look to the
policies that allowed the inflation to emerge.
(This is try whether or not you accept endogeneity
of the money supply.)  If the central bank in this
country suddenly committed to supply funds at, say,
a 5% annual rate, this would do nothing to fix the
inflation situtation.  Quite the opposite.

Alan G. Isaac

PS You may find the literature review in the following
paper to be helpful.
  author = {Isaac, Alan G.},
  month = {Fall},
  year = 1991,
  title = {Economic Stabilization and Money Supply Endogeneity in a Conflicting Claims Environment},
  journal = jpke,
  volume = 14,
  number = 1,
  pages = {93--110}