Equation 2 is a portfolio equilibrium condition or LM curve that states real money balances demanded increase as output demanded increases and as the

nominal rate of interest decreases.

What is needed for such a policy is simply that the

nominal rate of interest be set equal to a constant inflation rate, [bar.

In particular the focus is on changes in the money supply growth rate, [sigma], or more simply in the

nominal rate of interest because this is given by R - [sigma] + [rho] + [rho][sigma].

What do the data say about the relative plausibility of the following two types of models: models with a liquidity effect, and models with the implication that an exogenous increase in the monetary base drives the

nominal rate of interest up?

Let R(T) be the riskless

nominal rate of interest on a default-free zero coupon bond of the conventional kind (e.

An attempt to conduct monetary policy by permanently lowering the

nominal rate of interest could eventually lead to an unstable path for real output and prices.

The gross

nominal rate of interest at t is given by (5)

The empirical literature on the Fisher relationship has been divided on the question of whether variation in the expected

nominal rate of interest is attributable solely or largely to variation in the expected rate of inflation, Fama (1975), Mishkin (1993) and Evans and Lewis (1995) or not, Friedman and Schwartz (1982, pp 522-3).

The extra money then exerts a downward pressure on the

nominal rate of interest, which in turn creates an upward pressure on economic activity.

A necessary condition for monetary injections to drive down the

nominal rate of interest and increase output is n

It is common to define the

nominal rate of interest (r) as the sum of the expected real rate (i) and an inflation premium (p).

Even with a higher

nominal rate of interest, it will not appeal to pensions funds whose rules require them to raise existing pensions in line with the RPI.