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Inflation is Always and Everywhere an Interest-Rate Phenomenon

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  • Belanger, Gilles

Abstract

Following an earlier paper, I investigate an economy where nominal interest rates are rigid, but aggregate prices are not. Though the title exaggerates, interest rates rigidity does account for an uncanny number of stylized facts about inflation. This paper shows that previously shown results are robust to changes in the specification of interest rate rigidity. Results investigated include: (1) the procyclicality of inflation, (2) inflation control through interest rate manipulation,(3) the persistence of inflation since World War II, (4) the Great Moderation under inflation targeting, (5) real rate volatility under a gold standard, (6) the price puzzle.

Suggested Citation

  • Belanger, Gilles, 2016. "Inflation is Always and Everywhere an Interest-Rate Phenomenon," MPRA Paper 70841, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70841
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    References listed on IDEAS

    as
    1. Otto Eckstein & Allen Sinai, 1986. "The Mechanisms of the Business Cycle in the Postwar Era," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 39-122, National Bureau of Economic Research, Inc.
    2. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230, National Bureau of Economic Research, Inc.
    3. David Aikman & Andrew G. Haldane & Benjamin D. Nelson, 2015. "Curbing the Credit Cycle," Economic Journal, Royal Economic Society, vol. 125(585), pages 1072-1109, June.
    4. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    5. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1005-1060.
    6. Belanger, Gilles, 2014. "Interest Rates Rigidities and the Fisher Equation," MPRA Paper 54705, University Library of Munich, Germany.
    7. David López-Salido & Jeremy C. Stein & Egon Zakrajšek, 2017. "Credit-Market Sentiment and the Business Cycle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1373-1426.
    8. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 861-886.
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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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