Do High Interest Rates Reduce Inflation? A Test of Monetary Faith

Blair Fix

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Whenever inflation rears its head, the call soon comes to raise interest rates. The rationale is simple. Higher interest rates put a damper on the supply of money. And this monetary clamp slows inflation. It’s so intuitive that it must be true. Or is it? As the Reverend Brooke observes, it takes a person of true conviction to ignore apparent contradictions. As such, this post is designed to test your monetary faith. According to monetary orthodoxy, higher interest rates reduce inflation. Yet the evidence demonstrates that the opposite is true: higher interest rates are associated with higher inflation. With this evidence in mind, I invite you to read on. Put your monetary faith to the fire and see if it can survive.

Keywords: interest rate; inflation; Milton Friedman; monetarism; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E4 E43 E52 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:268655

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