Standard mortgage borrowing practices are incorporated into a model of the loanable funds market. Contrary to the Taylor rule (which is for short-term rates), in this model an increase in inflation causes the long-term nominal rate to rise by a smaller amount, leaving the real rate lower. In...

Without a little inflation, bad investment drives out good. Moderate inflation enhances productivity by functioning like a scarecrow: the rise in nominal mortgage rates deters myopic home buyers, who naively watch the nominal interest rate (in its guise as the payment-to-income ratio) rather...