Mainstream economic theory tells us that, in order to decrease inflation, the CB increases its rates so as to decrease loan creation which should decrease Aggregate Demand and thus lower inflation.

However I've read from other economists (especially Post-Keynesians and MMT'ers), that it would have an opposite effect and that an increase in those rates would increase inflation instead of decrease it since the government is a net payer of interest.

Which one of these two views is correct? And which is more supported empirically?

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    $\begingroup$ Sources would be nice. $\endgroup$ – Art May 19 at 6:34
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    $\begingroup$ The danger with this question is that the answers will end up as opinions. It might be safer to ask what the competing theories are, and how the theories are tested. I’m in the MMT camp, and unsurprisingly, I am critical about the neoclassical theories and the associated empirical work; and the same would go for neoclassical opinions about MMT arguments. $\endgroup$ – Brian Romanchuk May 19 at 14:44
  • $\begingroup$ @Art Warren Mosler, one of the leading founders of MMT: " MMT recognizes that with government a net payer of interest, higher interest rates can impart an expansionary, inflationary (and regressive) bias " Source: bondeconomics.com/2020/01/mmt-primer-moslers-white-paper.html $\endgroup$ – Metrician May 20 at 1:40
  • $\begingroup$ @BrianRomanchuk Since you're in the MMT camp what would be your take (as biased as it might be as you pointed out) on the empirical merits of price hikes being inflationary? $\endgroup$ – Metrician May 20 at 1:40
  • $\begingroup$ If we look at post-1990 data, I’m unconvinced that there’s any evidence that realised interest rates have had any effect on inflation. That’s consistent with MMT arguments. $\endgroup$ – Brian Romanchuk May 20 at 12:49

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