Re: Interest Rates and inflation

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

On Thu, 7 Dec 2000, Henry C.K. Liu wrote:
> Randy Wray, Geoffrey Gardiner, James Cumse or others never claimed that 20%
> interest rate is good economics.  They merely think that high interest rate
> cuases inflation in the long run.

Randy has clearly stated this, and if the quote
you supplied is representative, his reasoning appears
badly flawed. I have tried to explain why in other
posts, especially my post to Barkley.

> Alan Isaac has not prophesized anything.

John is correct that my view is that raising
the nominal rate to 20% in the US and holding
it there would precipitate a deflationary spiral.
He has correctly interpreted my posts.
I would of course prefer to call it a prediction.

> He made several trivial misjudgements,
> with considerable unjustied arrogance I may
> add, about my statement that many astute economists hold that view that high
> interest rate causes inflation, at least in the long run.  Alan claimed that
> none would, and that if they did, they are either not "astute", or I
> mischaracterized their position, and that both the statement and the position
> are false.

My view remains that very few economists
will dispute that both theory and evidence
indicate that raising interest rates does
not raise the long-run inflation rate.
I admit being surprised there were any.*

Let me add that it is far from clear
to me that Goeffrey and James accept
Randy's position that raising the US
interest to 20% and holding it there
will produce inflation close to 20%
in the long run. Rather I read their posts
as compatable with the supply shock
effect mentioned in my first post.
(E.g., Geoffrey's reference is
explicitly to the Gibson paradox.)
Perhaps they will clarify.

Alan Isaac

PS Just to clarify once again: that I believe
that your statement is incorrect and that
it mischaracterizes the economics profession
(which is the context in which I interpreted
``many'') was in no way intended as a personal
attack and, in particular, is *not* a claim
that you intended to mischaracterize
anything.

* With the exception of the  ``Unpleasant
Monetarist Arithmetic'' literature I cited
earlier.