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

[Chris Niggle <niggle@xxxxxxxxxxxxxx>]

Since interest rates are a cost of production, higher rates could lead to "cost push" inflation.
Second, the CPI calculation includes the cost of housing, which includes the interest rate cost of
servicing mortgages.  See Randy Wray and Papadimitriou's Levy Institute publications on inflation.

Chris

Alan G. Isaac wrote:

> 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}