RE: Interest Rates and inflation

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

It's my view that this discussion is missing a critical point. I am not
convinced that high interest rates (all other things held equal) will cause
the CPI to rise more rapidly. In fact, I am quite convinced that the
opposite will happen.

I think the more interesting issue is why the CPI does not incorporate
increases in costs to consumers and others of an increase in interest rates.
Clearly, consumers wind up paying higher monthly payments on many goods
(particularly housing and durables)due to an interest rate hike.

-----Original Message-----
From: John M. Legge [mailto:jlegge@xxxxxxxxxxxxxx]
Sent: Wednesday, December 06, 2000 6:53 PM
To: 'Post Keynesian Theory'
Subject: RE: Interest Rates and inflation


Harrumph!

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.

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.

If some CB was misguided enough to hold real interest rates at 20 per cent
indefinitely irrespective of the consequences I (like Alan Isaac) prophesy
deep depression and price deflation.

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,

JML


> -----Original Message-----
> From: pkt-owner@xxxxxxxxxxxxxxxx [mailto:pkt-owner@xxxxxxxxxxxxxxxx]On
> Behalf Of Christopher Niggle
> Sent: Thursday, 7 December 2000 4:31 AM
> To: Alan G. Isaac
> Cc: Post Keynesian Theory; niggle@xxxxxxxxxxxxxx
> Subject: Re: Interest Rates and inflation: reply to Barkley
>
>
>
> 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
> >
> >
>