Re: Interest Rates and inflation: reply to Barkley

[Christopher Niggle <niggle@xxxxxxxxxxxxxx>]

Barkley, Randy Wray, Alan, others interested:

I understand that an increase in interest rates can lead to a form of
"cost-push" inflation as supply prices rise to cover the increased cost of
financial capital.  But once prices are at a higher level, why should
maintaining the interest rates at that higher level lead to future
inflation?

The INCREASE in rates leads to a higher PRICE LEVEL, and to a higher
inflation rate during the transition to the higher price level.  But why
would a stable higher rate level lead to a permanent higher inflation
rate?

Perhaps I am missing something here.

Chris

On Tue, 5 Dec 2000, Alan G. Isaac wrote:

> Forwarded for Barkley.
> For some reason pkt msgs no
> longer go out with pkt in
> either the From or Reply-To
> fields, so one generally cannot
> just hit the Reply button.
> Alan
>
> ---------- Forwarded message ----------
> From: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
> To: Alan G. Isaac <aisaac@xxxxxxxxxxxx>
> Subject: Re: Interest Rates, Inflation,
>      Exchange Rates and Credit inBull And   Bear  Ma...
>
>      I think I'll pop my needle into this thread,
> especially given that it has been marked by
> a lot of heat on both sides.
>      One way to look at this (that may annoy some
> on the list) is to think about it in broad aggregate
> supply and aggregate demand terms (I realize
> that "classic" Keynes-Weintraub-Davidson-Smolensky
> AS-AD analysis has no price level in it, although Keynes
> implicitly had it in his discussion in Chap. 21 of the GT).
> This allows us to distinguish cost-push from demand-pull
> inflation. 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.  The mechanism for the latter does
> not rely on denying money endogeneity, just to keep Basil
> happy.  It is a matter of the downward-sloping marginal
> efficiency of investment schedule---higher interest rates
> reduce the demand for real capital investment and thus
> aggregate demand.
>       Which is more important in a given situation or time
> horizon is an empirical matter.  Clearly, most central
> banks believe that at least in the short run the demand
> side tends to outweigh the supply side and that thus
> they can fight inflation by raising interest rates.  Randy
> 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.  But, such a long run will come after
> a very bad recession, possibly depression, in which
> maybe not all of us will be dead, but a lot of people will be.
> Barkley Rosser
> -----Original Message-----
> From: Alan G. Isaac <aisaac@xxxxxxxxxxxx>
> To: Gunnar Tomasson <tomasson@xxxxxxxx>
> Cc: POST KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> Date: Tuesday, December 05, 2000 10:57 AM
> Subject: Re: Interest Rates, Inflation, Exchange Rates and Credit inBull And
> Bear Ma...
>
> > On Mon, 4 Dec 2000, Gunnar Tomasson wrote:
> >> My "basic economic intuition" advises that there exist no a priori ground
> s
> >> for supposing that entrepreneurs are less likely to raise output prices
> in
> >> response to higher interest costs than they are when faced with higher
> labor
> >> costs per unit output.
>
> > Of course.
> > You appear to have missed much
> > of this thread.
> > http://csf.colorado.edu/mail/pkt/2000/msg02390.html
>
> > Alan
>
>