The adverse supply-side effects of high interest rates and procyclical real wage movements
Despite widespread recognition that high interest rates may cause price increases through their influence on costs, this point has not been incorporated into simple aggregative macro models. We suggest a way of modifying the simple macro model to incorporate this effect, and by using reasonable parameter estimates, conclude that the supply side seems at least as responsive as the demand side to changes in real interest rates. An additional advantage of the amendment suggested in this note is that it is able to explain both procyclical and countercyclical movements in real wages.
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