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• W2130091235 abstract "TIGHT MONEY, Monetary Restraint, and the Price Level (2) was an attempt to analyze the short-run impact of interest rate movements on the price level within a two-commodity general-equilibrium framework. Hotson's complaint (3) involves mainly the empirical implications of the analysis, which he finds unsupported by postwar data. However, he also finds the theoretical treatment of a shift in investment unsatisfactory. I shall discuss this latter point first. Hotson argues (3, pp. 152-3) that my analysis of an increase in investment is selfcontradictory. In the text of my article (2, p. 22), the impact on the general price level is upward; in the appendix (Part C), downward. The text makes quite clear that there are two basic forces acting on the price level following a simultaneous increase in output and investment to a rise in the marginal efficiency of capital. One is the traditional deflationary influence of growth, by which additional output and income shift the demand schedule for balances to the right. Another is the inflationary influence of the higher natural rate of interest, which results from the increase in the investment schedule. The higher interest rate is traced along the prevailing liquidity preference function, reducing the quantity of balances demanded. The inflationary influence is assumed to predominate, but a footnote (2, p. 22, n.13) observes that it need not. By contrast, the appendix is an analysis of the real forces occurring in the commodity sectors following successive shifts in saving and investment, and abstracting from monetary phenomena. The impact of the disturbances on the price level is examined, assuming that the monetary authority has already offset any influences due to a reduction in the quantity of balances demanded (2, p. 18). Thus any remaining inflation can be attributed to the higher interest rate as a cost and production variable, rather than as a determinant of liquidity preference. I think the text was quite clear on this analytical sequence, although, in retrospect, the appendix could have stated its nonmonetary assumption more explicitly. In any case, on this procedure the inflationary influence is missing in the appendix and only the deflationary force of additional output remains. In the consumption sector, for example, the demand schedule shifts to the right less than supply, causing the price to fall. If Hotson were consistent, he would have also objected to the analysis of a decrease in saving. In the appendix (Part B), average prices are said to remain constant following that disturbance (output in this case is unchanged); in the text (2, p. 18), a reduction in saving, in the absence of offsetting monetary policy, is held to be unambiguously inflationary to the higher natural rate. Hotson moves swiftly from the analysis, right or wrong, to the data. According to Horwich's model, this doubling of the rate of interest [from 1947 to 1968] should have led to a fall in the price of capital goods relative to consumer goods. No such pattern is evident . (3, p. 153). At least two objections can be raised to this use of the model. First, it is a short-run apparatus with rising cost curves, inapplicable to such a long time span. For long-run analysis, a complete two-sector" @default.
• W2130091235 created "2016-06-24" @default.
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• W2130091235 date "1971-03-01" @default.
• W2130091235 modified "2023-09-26" @default.
• W2130091235 title "TIGHT MONEY AS A CAUSE OF INFLATION: REPLY" @default.
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• W2130091235 doi "https://doi.org/10.1111/j.1540-6261.1971.tb00600.x" @default.
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