2. The Economic Consequences of Interest Rate Hikes
According to Monetarism Mark I, interest rates are variables determined in the real economy; therefore, high interest rates do not necessarily imply monetary tightening, nor do low interest rates necessarily imply monetary easing.
In this respect, Monetarism Mark I's view of interest rates closely resembles Knut Wicksell's concept of the natural rate of interest.
The natural rate of interest is determined in the real economy by factors such as industrial structure and the relative prices of production inputs. In a country such as contemporary Japan, where an industrial structure led by recession-benefiting manufacturers of inferior goods has become entrenched, one is compelled to infer that economic growth is negative and that the natural rate of interest is likewise negative.
Under such circumstances, if the policy rate is raised and market interest rates significantly exceed the natural rate, the result will be a strong monetary tightening effect that further aggravates economic stagnation.
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2. The Economic Consequences of Interest Rate Hikes
According to Monetarism Mark I, interest rates are variables determined in the real economy; therefore, high interest rates do not necessarily imply monetary tightening, nor do low interest rates necessarily imply monetary easing.
In this respect, Monetarism Mark I's view of interest rates closely resembles Knut Wicksell's concept of the natural rate of interest.
The natural rate of interest is determined in the real economy by factors such as industrial structure and the relative prices of production inputs. In a country such as contemporary Japan, where an industrial structure led by recession-benefiting manufacturers of inferior goods has become entrenched, one is compelled to infer that economic growth is negative and that the natural rate of interest is likewise negative.
Under such circumstances, if the policy rate is raised and market interest rates significantly exceed the natural rate, the result will be a strong monetary tightening effect that further aggravates economic stagnation.