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A Critical Analysis of Monetarist-Rational Expectation-Supply-Side (Incentive) Economics Approach to Accumulation During a Period of Inflationary Expectations
Credit and Capital Markets – Kredit und Kapital, Vol. 14 (1981), Iss. 4 : pp. 496–504
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Davidson, Paul
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Abstract
A Critical Analysis of Monetarist- Rational-Expectations-Supply-Side (Incentive) Economics Approach to Accumulation during a Period of Inflationary Expectations
This article demonstrates that the Monetarist-rational-expectations view that a sudden widespread increase in inflationary expectations leads to, ceteris paribus, a proportionate increase in the nominal rate of interest, so that the real rate of interest is unaltered (compared to a state of zero inflationary expectations) is logically false. Moreover, it is shown that if there is a sudden widespread increase in inflationary expectations, ceteris paribus, the marginal efficiency of capital is raised. Thus supply-side and Monetarist economists who are searching for logical policies to stimulate investment and savings should be encouraging expectations of even greater rates of inflation and simultaneously urging Central Banks to lower bond prices (nominal interest rates) via open market operations.