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Some notes on Ricardo's analysis of the convergence process of the market rate of interest to the natural rate

Michele Ciccone

MPRA Paper from University Library of Munich, Germany

Abstract: This paper aims to be a preliminary critical discussion about one of the main accepted results of Ricardo’s theory of money and interest, i.e., that the ‘natural’ rate of interest is determined by the profit rate. It will be argued that some logical inconsistencies seem to affect Ricardo’s representation of the tendency of the market rate of interest to the natural rate, with the latter ultimately determined by the rate of profits. According to Ricardo, exogenous changes in the supply of, or demand for money generate short-run changes of the money-prices ratio and the market interest rate, and permanent changes in the price level play the role of bringing them back to their natural values (the natural rate of interest being taken as a fraction of the natural profit rate). We will try to show that the convergence process envisaged by Ricardo seems to be not free from some critical considerations about its internal coherence if one takes into due account what he conceives to be the specific inducement for the public to borrow a larger quantity of money at a lower interest rate—namely, an above normal difference between profit rate and interest rate, together with the behavior of the banking system and with the main institutional features of a monetary system.

Keywords: David Ricardo; natural and market rates of interest; quantity theory of money (search for similar items in EconPapers)
JEL-codes: B0 B31 E4 E40 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-hme, nep-hpe, nep-mac, nep-mon and nep-pke
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