The Real Rate of Interest, the Business Cycle, Economic Growth and Inflation: An Alternative Theoretical Perspective

The premise of this paper is that in a monetary production economy the policy decisions of the central bank determine not only the nominal interest rate, but also the real rate, defined in the usual way. This issue has always been a central point of contention between “classical” economists and their more heterodox opponents in monetary theory. This paper demonstrates that a comprehensive macroeconomic theory can be developed on this basis, including an explanation of economic growth, the business cycle, inflation, the functional distribution of income, the Keynesian problem of demand management, and technological change. A main result is an asymmetrical long run relationship between inflation and economic growth. The long run Phillips curve (LPRC) is not vertical, and the relationship between inflation and growth differs according to the source of exogenous “shocks” to the economy (including policy changes).