RE: Interest Rates and inflation: reply to Poirot re cpi

[Christopher Niggle <niggle@xxxxxxxxxxxxxx>]

Clifford:

The CPI does incorporate higher interest rates in the housing component.
Randy Wray's Levy Institute papers brought this to our attention.  Chris

On Fri, 8 Dec 2000, Clifford Poirot wrote:

> 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
> > >
> > >
> >
>
>