RE: Interest Rates, Inflation, Exchange Rates and Credit inBull A nd Bear Ma...

[Adam.Stokes@xxxxxxxxxxx]

What has happened to the hysteresis view of the world?
Very high interest rates are likely to dampen inflation, primarily by
killing off demand (and peoples hopes for a better future....'scuse the
cynicism). Yes, where possible, firms will pass interest rate costs onwards
and upwards.
However, this will all be self-defeating as once policy makers decide that
the brakes can come off, inflationary pressures will kick in earlier,
leading to a policy cyle that spirals in ever-smaller circles.
In a sense this validates everyone's arguments, or is this wishful thinking?

-----Original Message-----
From: User996472@xxxxxxx [mailto:User996472@xxxxxxx]
Sent: Monday, 4 December 2000 17:37
To: pkt@xxxxxxxxxxxxxxxx
Subject: Re: Interest Rates, Inflation, Exchange Rates and Credit inBull
And Bear Ma...


In a message dated 12/2/00 10:30:58 AM Eastern Standard Time,
hliu@xxxxxxxxxxxxxx writes:

<< I was trying to point out through simple
 logic that high interest rates cannot even slow inflation undr all
conditions,
 as the Fed frequently asserts. >>

Henry:

I think a distinction has to be made between the US, other developed
countries and underdeveloped countries -- taking into consideration their
distinct financial architectures, their structural differences, and so
forth;
hence, the "simple logic that high interest rates cannot even slow inflation

under all conditions..." may be too critical.  It can be postulated that
higher interest rates, in light of recent emerging market experiences, can
instigate both demand-pull inflation and cost-push inflation; however, the
generic assumption held by most Central Banks in industrialized economies is

that interest rates can work their way to dampen expectations of emerging
inflationary pressures (maybe not directly through higher interest rates,
but
indirectly through higher interest rates in the respective channels: Central

Bank's credibility on combating inflation, the burden of higher interest
cost
on consumption outlays, depressing private sector expectations and the list
goes on.)  Interestingly, if the current Central Banks' notion of combating
scant inflationary pressures through higher interest rates is a fallacy, as
you have asserted, runaway inflation should be evident by now in the
respective industrialized economies, as a corollary.  I have yet to witness
such events.

Warmest regards,
Tom