Disinflation and Interest-Bearing Money

Guillermo Calvo and Carlos Vegh

Economic Journal, 1996, vol. 106, issue 439, 1546-63

Abstract: In high inflation countries, policymakers often end up paying interest on part of the money supply. Higher interest rates on money have been used as a disinflationary policy. This paper analyzes the effectiveness of such a policy in the context of a closed-economy, staggered-prices model. Both a permanent and a temporary rise in the interest rate on money provoke an inflation at the expense of a recession. When the rise is temporary, however, the initial inflation slowdown is eventually followed by an upsurge of inflation over the level prevailing before the policy was implemented. Copyright 1996 by Royal Economic Society.

Date: 1996
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