[OPE-L:2308] Re: New Solution

Allin Cottrell (cottrell@wfu.edu)
Tue, 21 May 1996 12:57:37 -0700

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On Tue, 21 May 1996, Duncan K Foley wrote:

> The market determines the rate of interest, and if it believes that the
> debt of the state will depreciate in value, it will require an interest
> premium to offset that loss.

This is an interesting point, though it may be tangential to Duncan's
larger argument. What Duncan is saying looks like the "Fisher effect",
after Irving Fisher, who first (a) elaborated the theoretical mechanism
behind the idea and (b) showed, despite himself, that it had little
empirical support. Post-Keynesian monetary theorists are quite
critical of Fisher's basic idea, roughly on these grounds: The rate
of interest is inverse of the price of bonds; it should therefore
change if and only if something alters the relative attractiveness of
holding money and holding bonds. But an anticipation of inflation
(or "depreciation of the value of state debt") does not produce this
effect: a speed-up of inflation makes both money *and* bonds offering
some fixed coupon rate look less attractive than before, in equal
degree. I argued in a piece in the Scottish Journal a couple of years
ago that there is something to be said for a position intermediate
between the standard Fisher effect (which is typically retailed
uncritically in the macro texts) and the post-Keynesian rejection:
a relatively indirect and partial "Fisher effect" that emerges if
one focuses not just on the bonds/money margin but also the bonds/
real capital margin.