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gideon magnus's avatar

Very interesting indeed! I can't help but wonder though if higher interest rates tend to spur the belief that politicians will feel more pressure to be fiscally responsible (and people believe politicians don't think too deeply about the difference between nominal and real interest rates).

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ignacio's avatar

I found it very interesting and it got me thinking.

I think much of the debate centres on the interest elasticity of money demand. As Tobin wrote, this elasticity 'is a key parameter in macroeconomic theory' (1993, p. 53). Is the demand for money elastic or inelastic in response to market interest rates? The answer is crucial for understanding the impact of interest rates on inflation.

[Tobin, J. (1993). Price flexibility and output stability: an old Keynesian view. Journal of Economic Perspectives, 7(1), pp. 45–65].

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