DISINFLATION AND INTEREST-BEARING MONEY

In high inflation countries, policymakers often end up paying interest an part of the money supply. Higher interest rates on money have been used as a disinflationary policy. This paper analyses the effectivene ss of such a policy in the context of a closed-economy, staggered-pric es model. Both a permanent and a temporary rise in the interest rate o n money provoke an initial fall in inflation, at the expense of a rece ssion. When the rise is temporary, however, the initial inflation slow down is' eventually followed by an upsurge of inflation over the level prevailing before the policy was implemented.