Interest rates and inflation in the long-run
Category: Business and Money > Economics
Asked by: tacoma123-ga
List Price: $10.00
21 Jul 2006 09:20 PDT
Expires: 27 Jul 2006 19:51 PDT
Question ID: 748274
What is the relationship between inflation and interest rates in the long run? (and why?). In other words, in a vector error correction (VEC) model of inflation, the long-run coefficient of policy interest rate should be positive or negative? Thank you. Any help is appreciated Tacoma
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Re: Interest rates and inflation in the long-run
From: chickenhawk32-ga on 25 Jul 2006 13:24 PDT
In the economic "steady state" (i.e. long-run) the inflation rate is equal to the population growth rate. This occurs because once an economy reaches the steady state it has essentially reached full capacity. Therefore, markets have reach high levels of efficiency and the only growth that can (theoretically) occur is population growth, which will match the interest rate in order to maintain the same level of capital appreciation.
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