RE: Interest Rates and inflation

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

On Thu, 7 Dec 2000, John M. Legge wrote:
> Interest on fixed capital does NOT affect prices, since it is not part of
> the VARIABLE cost of production.  Interest on the debtors ledger and
> inventory could be considered a variable cost, but no accountants actually
> record it this way and so interest rate changes don't affect mark-up based
> prices.

I'm no expert on structuralism, but I believe the
usual structuralist story emphasizes the interest
on circulating capital. Further, it seems to me
that capital is ``fixed'' to varying degrees in
varying businesses.  So I do not rule out the
supply shock effect. (I know there's been some
macro empirical work on it, but at the moment
I cannot recall the outcome. Anyone?)

> High interest rates may tend to raise prices by:
> a) stimulating wage demands (in an economy where blue collar labour has any
> bargaining power)
> b) by deterring investment, including replacement investment, leading to
> product supply constraints

> As far as I can see these effects will usually be outweighed by the effect
> of depressing consumer demand (as more of consumers' disposable income is
> absorbed by interest payments) and the unemployment arising from reduced
> investment through well-established Keynesian mechanisms.

Agreed.

> To say that the CB can eliminate inflation by raising interest rates has the
> same moral content as to say a doctor can cure a headache by cutting the
> patient's throat: true statements don't necessarily describe desirable acts,

I tried to say this to James,
but not as effectively.

Cheers,
Alan