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Fisher's Theory of Interest Rates and the Notion of Real: 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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  • Eric Tymoigne, 2006. "Fisher's Theory of Interest Rates and the Notion of Real: A Critique," Economics Working Paper Archive wp_483, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_483
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    References listed on IDEAS

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    2. Cottrell, Allin, 1994. "Keynes and the Keynesians on the Fisher Effect," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(4), pages 416-433, November.
    3. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    4. Frank Hahn, 1985. "Money and Inflation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262580624, January.
    5. Kregel, J A, 1985. "Hamlet without the Prince: Cambridge Macroeconomics without Money," American Economic Review, American Economic Association, vol. 75(2), pages 133-139, May.
    6. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    7. Noor Ghazali & Shamshubariah Ramlee, 2003. "A long memory test of the long-run Fisher effect in the G7 countries," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 763-769.
    8. Davidson, Paul, 1972. "A Keynesian View of Friedman's Theoretical Framework for Monetary Analysis," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 864-882, Sept.-Oct.
    9. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    10. Carmichael, Jeffrey & Stebbing, Peter W, 1983. "Fisher's Paradox and the Theory of Interest," American Economic Review, American Economic Association, vol. 73(4), pages 619-630, September.
    11. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    12. L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar Publishing, number 474.
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