Showing papers on "Real interest rate published in 1969"

The Nature of the Policy Problem

Abstract: There is an enormous gap between monetary theory and the discussion or practice of monetary policy. Most economists agree on the general outline of a theory —at least the comparative statics framework —linking money to prices and output. As long as discussion is confined to general frameworks that have minimal content, one can easily agree on some vague principles by which monetary policy should be guided and on the measures to be used as a standard of performance for policy. Implications of the theory are translated into guidelines for action, such as: Maintain the market rate of interest above, below, or equal to the real rate on real capital required to induce investors to hold the inherited capital stock, or equal to the real rate plus the expected rate of change of prices; or maintain full employment and growth without inflation.

Effects of money on interest rates

Abstract: Monetary authorities also tend to take for granted that an increase in the money stock lowers interest rates. From their vantage point, an increase in the money stock by way of an open-market purchase tends to lower market rates quickly, since purchasing securities raises their prices and lowers yields. Indeed, they rely on this relation in order to control rates. Accordingly, interest-rate movements are frequently viewed as indicators of recent monetary policy. Since the money/interest-rate relation is used in implementing monetary policy, it is particularly important that the monetary authorities know how the relation works. If the monetary authorities believed that they lower interest rates by increasing the money stock whereas this at first lowers and then later raises rates, the authorities' actions would work first toward and then against an interest-rate goal. Further, if interest rates are viewed as indicators of monetary policy, incorrect conclusions can easily follow if total effects are disregarded in favor of initial effects. The trouble with using interest rates as indicators of monetary policy is as follows: If income increases faster than money, interest rates will tend to rise, but if the income increase results from increases in the money stock, should monetary policy be called restrictive?

Project appraisal in inflationary conditions

Abstract: Inflation results in large fluctuations in relative prices that create numerous difficulties for those who must make project appraisals and who must establish intermediaries like development banks, agricultural credit banks, and building societies. The two aspects of project evaluation that are relevant are the appraisal of economic merit and the appraisal of financial viability. The problems can be dealt with by distinguishing between project benefits that are adequately represented by market prices and those that are not and by using market price to determine the former and regulated prices to determine the latter. For predicting future costs, relative pricing patterns must be reduced to long-term trends, based on international prices and factors in the domestic economy. Appraisal of financial viability involves prediction of market prices, real wage changes, trade price changes, utility price changes, the pace of inflation, and changes in regulated prices. The best solution seems to be the tying of all debts to some index that can ideally serve the whole economy. The benefits of even this sort of imperfect system are immense in terms of increased monetary savings, better allocation of resources, and the fostering of long-term financial contracts. 16 references.