The Interest Rate as an Artifact of Self‐Validating Beliefs Under Different Price‐Quantity Interactions

Abstract

The paper examines the role of the interest rate as a conventional variable, influenced by political, institutional and structural factors, and in particular, by central bank's beliefs. To this aim, we develop a minimal model inspired in the New Consensus literature but aligned with the post Keynesian principles on output and income distribution. We show that these beliefs can exert their influence under quite general circumstances, compatible with alternative hypotheses about the connection between prices and quantities. The role of these beliefs is finally examined in an open economy framework.