Interest Rates, Interest Spreads and Monetary Circulation: Theoretical Framework and Empirical Implications for Macroeconomic Performance

Abstract

Traditional neoclassical macroeconomics confers an important position to interest rates in determining macroeconomic activity but pays little attention to the possible role of interest spreads. In contrast, as Augusto Graziani (1987, p. 25; 2003, p. 123) makes it abundantly clear, the relation among subsets of the vast array of interest rates in a modern monetary economy may be of critical significance, especially since these rates pertain to different aspects of the process of monetary circulation. Indeed, as soon as one adopts a circuitist perspective where credit relations are crucial and where, inter alia, the distinction, made famous by Graziani (1987), between initial and final finance, becomes relevant, suddenly the relations among the various rates associated with the flux/reflux process take on new meaning and offer insights that were hitherto inconceivable within traditional macroeconomic analysis. The object of this chapter is to discuss how some of these interest rates are envisioned within the framework of the monetary circuit, and what theoretical and empirical implications changes in both levels and interest spreads could have on macroeconomic performance.

With the usual disclaimer applying, the author would like to thank Carlo Giannone, Marc Lavoie, Warren Mosler, Alain Parguez and Louis-Philippe Rochon for their very helpful comments.