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Do High Interest Rates Reduce Inflation? A Test of Monetary Faith

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  • Fix, Blair

Abstract

Whenever inflation rears its head, the call soon comes to raise interest rates. The rationale is simple. Higher interest rates put a damper on the supply of money. And this monetary clamp slows inflation. It’s so intuitive that it must be true. Or is it? As the Reverend Brooke observes, it takes a person of true conviction to ignore apparent contradictions. As such, this post is designed to test your monetary faith. According to monetary orthodoxy, higher interest rates reduce inflation. Yet the evidence demonstrates that the opposite is true: higher interest rates are associated with higher inflation. With this evidence in mind, I invite you to read on. Put your monetary faith to the fire and see if it can survive.

Suggested Citation

  • Fix, Blair, 2023. "Do High Interest Rates Reduce Inflation? A Test of Monetary Faith," EconStor Preprints 268655, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:268655
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    More about this item

    Keywords

    interest rate; inflation; Milton Friedman; monetarism; monetary policy;
    All these keywords.

    JEL classification:

    • 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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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