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An interest rate peg, inflation and output

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  • MacKinnon, Keith
  • Smithin, John

Abstract

This paper models a "credit economy" in which the only exchange media are bank liabilities created as a by-product of the demand for finance by firms. Monetary policy involves the "pegging" of interest rates and, since there is no "natural rate" of interest in the model, is non-neutral. If the authorities peg the real rate, a Phillips curve type relationship emerges. Lower settings of this rate lead to both higher output and inflation. This restores something of the Wicksellian notion of the "cumulative process," but in a context of variable equilibrium output. If nominal rates are pegged, then lower settings will lead to both lower inflation (contrary to Wick-sellian tradition) and output.

Suggested Citation

  • MacKinnon, Keith & Smithin, John, 1993. "An interest rate peg, inflation and output," Journal of Macroeconomics, Elsevier, vol. 15(4), pages 769-785.
    • Handle: RePEc:eee:jmacro:v:15:y:1993:i:4:p:769-785
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    Citations

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    Cited by:

    1. John Smithin, 2002. "The Rate of Interest, Economic Growth, and Inflation: An Alternative Theoretical Perspective," Working Papers geewp23, Vienna University of Economics and Business Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
    2. Lindh, Thomas & Malmberg, Bo, 1998. "Age structure and inflation - a Wicksellian interpretation of the OECD data," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 19-37, July.
    3. Paschakis, John & Smithin, John, 1998. "Exchange Risk and the Supply-Side Effects of Real Interest Rate Changes," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 703-720, October.
    4. Paraskevopoulos, Christos C. & Paschakis, John & Smithin, John, 1996. "Is monetary sovereignty an option for the small open economy?," The North American Journal of Economics and Finance, Elsevier, vol. 7(1), pages 5-18.
    5. Eric Kam & John Smithin & Aqeela Tabassum, 2018. "The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model," Working Papers 074, Toronto Metropolitan University, Department of Economics.

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