INTEREST AS AN ARTEFACT OF SELF-VALIDATING CENTRAL BANK BELIEFS

The classical/Sraffian approach to distribution is proposed as a more congenial framework for Keynes's concept of interest as a conventional variable-resulting from the interplay between central bank behaviour and financial market sentiment-because it provides a sounder basis for multiple interest rate equilibria. While either monetary policy or market expectations can be decisive, the capacity of policy to ensure markets acquiesce in the authorities' view remains at least as plausible as Keynes supposed. Interest is a result of 'history' plus the beliefs of the monetary authorities, where those beliefs may be illusory but nevertheless validated by actual outcomes. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.