ISSN:
1467-6435
Source:
Blackwell Publishing Journal Backfiles 1879-2005
Topics:
Sociology
,
Economics
Notes:
The paper analyzes the effect of inflation on interest rates in the context of economic growth. It is well known that in a stationary economy inflation will result in an upward adjustment in the nominal rate of interest on bonds, but by less than the rate of inflation. To the substitution effects operating under stationary conditions economic growth adds income effects. These will generally reduce the adjustment on interest rates and may, in exceptional cases, even produce a fall in the (nominal) bond rate. This is because inflation, by stimulating capital formation, may increase real income which, depending on the income elasticity of the demand for different assets, stimulates the demand for bonds. The exceptional case may materialize even under stable conditions. The analysis is based on a model of balanced growth with stock demand functions for capital goods, bonds and cash balances, while money is issued by the government in purchasing goods and services.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1111/j.1467-6435.1970.tb02544.x
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