Re: Interest Rates, Inflation, Exchange Rates and Credit inBull And Bear Ma... (fwd)

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

---------- Forwarded message ----------
From: Alan G. Isaac <aisaac@xxxxxxxxxxxx>
Organization: American University http://www.american.edu
To: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
Subject: Re: Interest Rates, Inflation,
     Exchange Rates and Credit inBull And   Bear  Ma...

On Tue, 5 Dec 2000, J. Barkley Rosser, Jr. wrote:
> Thus, higher interest rates tend to push inflationary
> pressure up from the supply-cost-push side while
> they tend to reduce inflationary pressure from the
> demand-pull side.
> . . .
>       Which is more important in a given situation or time
> horizon is an empirical matter.

This is the ``supply shock'' effect I mentioned in
my original post
 http://csf.colorado.edu/mail/pkt/2000/msg02387.html

> Wray however remains correct that in the long run if
> the central bank imposes and enforces and maintains
> a 20% interest rate, that eventually inflation will have to
> be near that level.

This seems quite wrong.
Here is the nugget of truth to it:
we cannot sensibly describe a steady
state with 20% interest rates unless
the description includes inflation rates
near that level. OK. But it does not
follow from that that the Fed could
raise interest rates to 20% now, and
keep them there, and thereby produce
20% steady state inflation.
That *causal* story is completely
untethered, since the policy leads to
the deflationary consequences you
describe and not towards such a steady state.

So again I insist that theory as well
as evidence speak strongly against the
proposition that the Fed can raise the
LR inflation rate by aggressively raising
interest rates.

Alan