Apparently, Mundell and Tobin used different methods to explain the Mundell-Tobin effect (which means that in general higher inflation increases the nominal interest rate, but decreases the real interest rate so Fisher's statement about the one-for-one adjustment of the nominal interest rate to the increase in inflation is slightly wrong) and I have two questions regarding their arguments:
- According to Mundell, higher inflation reduces demand for money and increases demand for Bonds, decreasing the required return on bonds and decreasing the real interest rate.
Question here: Aren't required return on bonds "nominal"? So I assume here that the decrease in the required return for bonds means a decrease in the "nominal" interest rate. But isn't the Mundell-Tobin effect supposed to result in 'higher' nominal interest rates? This looks likes a contradiction to me but obviously I'm pretty sure I'm misunderstanding something here so I wish to know what I'm missing.
- According to Tobin, higher inflation reduces demand for money and increases demand for real capital, decreasing the marginal productivity of capital and decreasing the real interest rate.
Question here: I believe that an increase in the demand for real capital means the same thing as the increase in the demand for loanable funds to acquire capital as investment(in the loanable funds market). In this case the rightward shift of the demand curve for lonable funds actually increases the real interest rate in the loanable funds market, which directly contradicts Tobin's statement (since it is the real interest rate that is associated with the loanable funds market, not the nominal interest rate). So how should I understand this contradiction?