Interest rates and inflation in the Leontief - Sraffa framework

Abstract

The traditional theories define the real interest rate as the difference between the nominal interest
rate and the inflation rate, which holds true in the case of demand pull inflation. Analysing interest rates
and inflation in the Leontief - Sraffa framework, the definition of the real interest rate differs. More
precisely, the real interest is given by the production technology for the prevalent wages in such a way as
to ensure price stability. Thus, in a state of cost push inflation the monetary policy of increasing the
nominal interest rate is not the appropriate remedy. Such a policy will results in increasing the inflation
rate, which in its turn will lead to the increase of unemployment rate as well.