FisherÕs Theory of Interest Rates and the Notion of ÒRealÓ: A Critique

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FisherÕs Theory of Interest Rates and the Notion of ÒRealÓ: A Critique

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Eric Tymoigne

Abstract

By providing five different criticisms of the notion of real rate, the paper argues that this concept, as Fisher defined it or as a definition, is not relevant to economic analysis. Following Keynes and other post-Keynesians, the article shows that the notion of real rate is microeconomically and macroeconomically unfounded. Adjusting interest rates for inflation does not protect the purchasing power of wealth, and it is impossible to do so at the macroeconomic level. In addition, an empirical interpretation of the break in the correlation between interest rates and inflation since 1953 is provided.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_483.

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Date of creation: Dec 2006
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Handle: RePEc:lev:wrkpap:wp_483

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-02-24 (All new papers)
NEP-HPE-2007-02-24 (History & Philosophy of Economics)
NEP-MAC-2007-02-24 (Macroeconomics)
NEP-MON-2007-02-24 (Monetary Economics)
NEP-PKE-2007-02-24 (Post Keynesian Economics)

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Other versions:
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Other versions:
- Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
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Other versions:
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