Interest rates and inflation in the Leontief - Sraffa framework
Part of : Σπουδαί : journal of economics and business ; Vol.47, No.1-2, 1997, pages 21-33
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21-33
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The traditional theories define the real interest rate as the difference between the nominal interest rate and the inflation rate, which holds true in the case of demand pull inflation. Analysing interest rates and inflation in the Leontief - Sraffa framework, the definition of the real interest rate differs. More precisely, the real interest is given by the production technology for the prevalent wages in such a way as to ensure price stability. Thus, in a state of cost push inflation the monetary policy of increasing the nominal interest rate is not the appropriate remedy. Such a policy will results in increasing the inflation rate, which in its turn will lead to the increase of unemployment rate as well.
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