This document discusses inflation in the equilibrium business-cycle model. It covers how expected real interest rates have intertemporal substitution effects on consumption and labor supply. A change in inflation will therefore have these substitution effects for a given nominal interest rate. It also explains that when expected inflation is zero, the nominal interest rate on bonds equals the rate of return from owning capital minus the depreciation rate of capital. Finally, it states that the document will replace the nominal interest rate on bonds with the expected real interest rate.

1. EC4004 Lecture 10
Inflation, Money Growth,
Interest Rates
Stephen Kinsella | www.stephenkinsella.net

2. Last Time:
Data
Inflation Interest
Inflation in the
Equilibrium Business-
Cycle Model

3. Inflation in the Equilibrium
Business-Cycle Model
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4. Inflation in the Equilibrium
Business-Cycle Model
Intertemporal-Substitution Effects
The expected real interest rate, ret , has
intertemporal-substitution effects on
consumption and labor supply.
Therefore, for given it, a change in πt will have
these intertemporal-substitution effects.
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