Are High Interest Rates Effective for Stopping High Inflation? Some Skeptical Notes

Guillermo Calvo

The World Bank Economic Review, 1992, vol. 6, issue 1, 55-69

Abstract: High interest rates are considered an effective tool for stopping high inflation. The case for a policy of high interest rates is developed in terms of a conventional IS-LM model. However, among other things, the model ignores some central aspects of modern credit markets. In particular high interest rates may give rise to nonperforming bank loans, thus seriously jeopardizing the effectiveness of the policy. Examples are developed in which it would be optimal to aim for equilibriums of low, rather than high, interest rates. One of these examples hinges on the existence of nonindexed domestic debt. Copyright 1992 by Oxford University Press.

Date: 1992
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