Showing papers on "Real interest rate published in 1972"

Inflationary Finance and the Welfare Cost of Inflation

Abstract: This paper applies previous theoretical and empirical results on inflation and demand for money to a study of inflationary finance and the welfare cost of inflation. The amount of revenue generated by a steady inflation is derived as a function of the inflation rate and some underlying parameters. Empirically, the revenue-maximizing rate is on the order of 140 percent per month with the corresponding revenue approximating 15 percent of national income. It is argued that hyper-inflations become unstable when the revenue-maximizing rate is exceeded. Because inflation leads to higher transaction costs (resulting from greater payment frequencies and reduced use of "money" as a payments medium), there is a net social cost attached to inflationary finance. The model implies that marginal collection costs of inflationary finance exceed 50 percent for all positive rates of inflation-hence, alternative means of raising revenue should be socially preferable. The analysis also provides estimates of the social gain from moving to the optimum quantity of money as 1-3 percent of income.(This abstract was borrowed from another version of this item.)

A Note on Inflation and the Saving Rate

Abstract: IN AN EARLIER PAPER FOR Brookings Papers on Economic Activity, we presented findings on the relation between price inflation and consumer saving in the context of examining the role of expectational variables in consumer spending and saving decisions.' The paper focused primarily on durable goods expenditure models, and presented evidence on the usefulness of explicitly expectational variables in such models. We also looked briefly at a relatively simple saving function to see if the same expectational variables that were associated with durable goods expenditure decisions also had an impact on saving decisions. This report focuses entirely on saving, and is concerned primarily with models that can be used to predict the personal saving rate. In this report, we examine three sets of variables for their impact on the saving rate. The first is personal taxes and transfer payments, which the evidence suggests have a strong initial impact on observed saving behavior. Second, we include both the levels of and changes in the unemployment

The Role of Interest Rates and Inflation in the Consumption Function

Abstract: MOST OF THE ANALYSIS of the effects of interest rate changes on consumption has been concerned with (1) the relative importance of income and substitution effects in determining how households will allocate their resources over time, and (2) the substitution effect at a moment of time determining the demands for durable versus nondurable consumption goods. But two other types of interest rate effects on consumption-effects that have received little attention in the literature-may be of some importance and are the subject of this report. The rate of inflation enters the analysis because of the wedge it drives between the nominal and real rates of interest. One of the effects to be considered is a consequence of the fact that the real rate of interest helps determine the services yielded by the stock of consumer durables. Following a common practice in econometric work on consumption, the services of durables are included in consumption and purchases of consumer durables are excluded. Services of durables must also be added to disposable income. Since the value of such services cannot be ascertained from market transactions, it must be imputed. The stock of consumer durables is first estimated, and then multiplied by a depreciation rate and a net rate of return to obtain the gross yield on the stock. Since

Inflation and Real Interest Rate: A Long-Term Analysis

Abstract: When the cost of living is not stable, the rate of interest takes the appreciation and depreciation into account to some extent, but only slightly, and, in general indirectly. That is, when prices are rising, the rate of interest tends to be high but not so high as it should be to compensate for the rise, and when prices are falling, the rate of interest tends to be low, but not so low as it should be to compensate for the fall. [Fisher 1930, p. 43]