As I frequently make clear, Monetary Sovereignty is a first “kissin’” cousin to Modern Monetary Theory. They agree on virtually everything, with the exception of the prevention and cure for unemployment and the prevention and cure for inflation.

I touch on both of these at: and at

Warren Mosler and I have had several discussions about inflation and its prevention and cure, with him taking the position that money supply is the key, and me taking the position that money value is the key. For a more complete discussion,, You might look at the inflation post listed above and at

In summary, Warren believes raising interest rates is inflationary, because it increases costs (true), and I believe the cost increase is relatively small, and raising interest rates is deflationary, because it increases the value of money.

Today, Warren sent me an Email containing a slightly esoteric, 26 page paper titled, Is There a Cost Channel of Monetary Policy Transmission? An Investigation into the Pricing Behavior of 2,000 Firms

Author(s): Eugenio Gaiotti and Alessandro Secchi Reviewed work(s):Source: Journal of Money, Credit and Banking, Vol. 38, No. 8 (Dec., 2006), pp. 2013-2037
Published by: Ohio State University PressStable URL:

Warren had received the paper from Nathan Tankus, who said: “Attached is a paper showing empirical support for the cost channel view of monetary policy. What’s significant is that it appears in a very main stream journal (Journal of Money, Credit and Banking). Thought you’d like to have a copy of this.
Nathan Tankus”

Warren sent the paper to me, with this comment: “Part of what I’ve been suggesting- rate hikes may cause inflation etc.

My response:

“What they (Gaiotti and Secchi) said is: ” . . . in the short run an increase in interest rates may cause prices to rise, rather than to Fall. However, empirical evidence in favor of this hypothesis is not abundant and remains controversial. Virtually all of it is based on aggregate-sometimes sectoral-data and, in particular, on the identification of a short-term positive response of aggregate prices to interest rate shocks. It is well known that macro-evidence regarding the effects of monetary shocks is subject to substantial identification and specification problems and, consequently, to considerable uncertainty of interpretation.

Lots of “short run” (one day??), “evidence . . . not abundant,” “controversial” and “uncertainty” words in that paragraph.

I understand the notion that higher interest rates add to business costs, though for most businesses, an increase in interest rates would amount to a minuscule addition to overall costs.

However, the most powerful, empirical evidence we have is this: For many years, the Fed successfully has raised interest rates to control inflation. If raising rates actually caused inflation, and the Fed was compounding the inflation problem, surely that effect be obvious by now.


Taking the MMT side, unquestionably an interest increase can increase business costs. Even more so when you consider that some businesses sell to other businesses, and if everyone is borrowing, there will be a multiplier effect. Further, increasing interest rates forces the federal government to pay more on its debts, which adds to the money supply. All of this can be inflationary.

On the Monetary Sovereignty side, increasing interest rates increases the value of the dollar vs other currencies and non-money. This makes imports less costly, and because imports continue to be of increasing importance to our economy, their anti-inflationary effect grows. Even for products that are manufactured in the U.S., imports of parts and raw materials are sensitive to the strength of the dollar.

Since all sales really are a form of barter, in which dollars are traded for goods and services, the more valuable the dollar, the fewer will be needed to trade.

As an aside, the Gaiotti and Secchi paper specified “short run,” and one might question whether this is of prime importance, even if it occurs.

Given all of the above hypotheses, I lean toward the empirical evidence that what the Fed has been doing –raising rates to stop inflation — seems to have kept inflation near the Fed’s target. This approach also has the advantage of being fast, effective in tiny increments, and apolitical.

Contrast that with changing the money supply via tax increases and spending decreases (the MMT) approach, which is slow, requires large, uncertain increments, and is highly political, affecting specific groups unfairly.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports