"The supply-side effect of a restrictive monetary policy is likely to be perverse, in that high interest rates enter into costs and thus exert inflationary pressure"
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Vickrey is doing something rarer than it should be in economic debate: puncturing a comforting slogan with a mechanism. The orthodox story says tight money cures inflation by cooling demand. He’s warning that, on the supply side, the cure can mimic the disease. When interest rates spike, they don’t just discourage borrowing; they become an input cost. Debt service rises for firms financing inventories, payrolls, equipment, and real estate. Landlords roll higher financing costs into rents. Utilities and infrastructure providers pass them through in regulated rate cases. Even governments, facing higher borrowing costs, may raise fees or taxes. The “perverse” effect is not mystical; it’s accounting, and then pricing.
The subtext is a rebuke to the moral theater that often accompanies inflation fighting: the idea that pain is proof of seriousness. Vickrey implies the opposite. A policy can be “tough” and still be counterproductive if it ignores how modern production is financed. He’s also pointing at timing. Monetary tightening works with lags, but interest costs hit immediately, and firms with pricing power can translate them into today’s sticker shock.
Context matters: Vickrey, a Nobel-winning economist associated with practical, sometimes unfashionable ideas (like congestion pricing), was writing in an era when central banks leaned hard on rate hikes to restore credibility. He’s asking whether credibility is being purchased by outsourcing inflation to cost channels, then blaming “the market” for the bill. The line lands because it exposes a quiet irony: raising the price of money can raise the prices of everything else.
The subtext is a rebuke to the moral theater that often accompanies inflation fighting: the idea that pain is proof of seriousness. Vickrey implies the opposite. A policy can be “tough” and still be counterproductive if it ignores how modern production is financed. He’s also pointing at timing. Monetary tightening works with lags, but interest costs hit immediately, and firms with pricing power can translate them into today’s sticker shock.
Context matters: Vickrey, a Nobel-winning economist associated with practical, sometimes unfashionable ideas (like congestion pricing), was writing in an era when central banks leaned hard on rate hikes to restore credibility. He’s asking whether credibility is being purchased by outsourcing inflation to cost channels, then blaming “the market” for the bill. The line lands because it exposes a quiet irony: raising the price of money can raise the prices of everything else.
Quote Details
| Topic | Money |
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