On the Separation between Prices and Quantities. A Note on the Interest Rate as an Artifact of Self-Validating Beliefs

CSWP 68 (September 2024)

Author Ariel Dvoskin and Emiliano Libman

Keywords Inflation Targeting, Interest Rates, Monetary Theory of Distribution, New Consensus Model.

JEL E31; E52; E58.

Following Aspromourgos’ (2007) steps, in this paper we examine the role of the interest rate as a “conventional” variable under different assumptions regarding price and quantity determination, that aim to characterize the reaction functions of Central Banks, represented in standard New Consensus models. More specifically, we lay out a minimal model and suggest a taxonomy that helps examining under which conditions prices and quantities can be determined independently of each other, and whether there is or there is not a unique natural rate of interest consistent with the equilibrium level of output. We argue that the natural rate of interest need not exist even if, as the New Consensus argues, we allow prices and quantities to be somehow connected.

Download the paper