Abstract

Interest Rates, Monetary Policy and Inflation

The importance of the study lies in the fact that, in addition to bank liquidity, the interest level is a significant indicator for judgment of monetary developments and the effects of monetary policy decisions. A high interest level is regarded as synonymous with a restrictive phase and a low interest level as synonymous with an expansive phase. The interrelationship presupposed by this interpretation of the interest level as an indicator is given only when monetary policy measures have a dominant influence on interest level changes. It is no longer extant when the trend in the demand for credit exerts the dominant influence on changes in the interest level. Superimposed on the influence of monetary policy measures and the path of credit demand on the interest level are the expectations of economic units as to future price trends. Economic entities derive their expectations from their experience with past price trends, i. e., for the recent past from the inflation rate. Empirical studies confirm the existence of the three effects mentioned. The height of the interest level for the medium term is dependent first and foremost on price expectations. These results are based on application of the ALMON method. In the Federal Republic of Germany, the long-term interest rate rises over the course of time by 80 to 85 %/o of the expected inflation rate. For example, an expected 5 °/o price increase rate causes an absolute increase of 4 to 41/40/o in the interest rate. Half of the price expectation effect is transmitted as early as in the first 6 to 7 months. It has taken full effect in about 2 years. The real interest rate corresponds to the difference between the observed nominal interest rate and the expected inflation rate. The real interest in the Federal Republik of Germanyis at a level of 5 %/ and fluctuates only within narrow limits.