Abstract

Real Interest, Inflation and Macroeconomic Equilibrium

The distribution of the effects of persistent inflationary impulses on real and nominal interest rate levels is a matter of dispute in monetary policy. It is possible to prove, within the framework of two common macroeconomic assumptions, both the superneutrality- of-money prognosis – in this case the real rates of interest remain unchanged – and the expansionary-growth-impulse prognosis – in this case the real interest rates decline. Steindl attempted to prove in this publication (1985) that both standard assumptions do not stand a fundamental equilibrium theory test, because they seem to contradict the Walrasian law. This contribution, by contrast, shows that both standard assumptions are nonetheless compatible with Walras’ law when interpreted as special border-line cases of this law. Furthermore, the solution Steindl proposes, which is based on the static Pigou effect, is rejected as untenable in terms of transmission theory: There is no transmission requirement with perfect price £flexibility and, thus, no property effect. Instead, a variant of the macroeconomic system is presented, which takes account of the Walrasian law in a general manner covering the two results ordinarily obtained, as border-line cases. In the last analysis, superneutrality of inflation is the case only in the absence of stocks of interest-bearing public-sector papers. If, on the other hand, such stocks of public-sector papers do exist, the inflationary impulse takes the form of rising nominal and falling real rates of interest. However, there is room for an element of relativity in this result itself, because the implications of the real inflation tax for the public sector’s budget dynamism have been left unconsidered.