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New Results in Capital Theory and Implications for the Theory of Inflation

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  • Bertram Schefold

    (Goethe University, Germany)

Abstract

The main policy to fight modern inflations is to raise interest rates. This lowers the pressure of demand and thus curbs the rise of prices. But interest is an element in cost of production and higher interest rates render the financing of investment more difficult. If the rise of interest costs is persistent, it adds to costs in the long run and becomes a component of long-run prices, so that it is not obvious what will prevail. In this paper, we focus on the long-run aspect using the classical theory of long-run prices (Sraffa, 1960). Under this approach if the interest rate results from monetary policy, this will determine the rate of profit and also the wage rate. In the context of the Monetary Theory of Distribution, raising interest rates at first adds to inflation by imposing additional costs on producers. We call this the Tooke effect. However, the sudden rise of the rate of interest reduces effective demand, exerting a pressure on prices, which, according to all experience, ultimately prevails and inflation is reduced.

Suggested Citation

  • Bertram Schefold, 2023. "New Results in Capital Theory and Implications for the Theory of Inflation," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(82), pages 27-51, November.
    • Handle: RePEc:bcr:ensayo:v:1:y:2023:i:82:p:27-51
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    References listed on IDEAS

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    1. Martín Uribe, 2022. "The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 133-162, July.
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    More about this item

    Keywords

    classical theory of long run prices; cost of production; inflation; interest rates; monetary theory of distribution; Tooke effect;
    All these keywords.

    JEL classification:

    • B51 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Socialist; Marxian; Sraffian
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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