Money, Inflation, and Interest Rates in the Market-Clearing Model

This chapter uses the market-clearing model to study inflation and nominal interest rates. For the main analysis we return to the setting from Chapter 5 that does not deal explicitly with a labour market or firms. As we saw in Chapter 6, this simplification will be satisfactory for most purposes. The basic approach will be to specify a given time path of the money stock, M _t . Then we figure out what time path of the price level, P, — hence, of the inflation rate, π _t — and of the nominal and real interest rates, R_t and r _t satisfy the conditions for general market clearing.