UNCERTAINTY, MONEY AND THE “FAIR” RATE OF INTEREST

Abstract

This paper presents a redefinition of notion of the inter-temporal distributional neutrality underlying the “fair†rate of interest of Lavoie (1999). The authors re-define the notion by replacement of the labor-time constant purchasing power method by a more feasible method of a discounted value of consumption. Next, a general proof is provided by the authors of Lavoie’s postulate of the equality of the real “fair†rate of interest to the productivity growth rate. This proof is provided separately for a nonproductive and a productive economy. Subsequently, the authors present their own 45° “fair†rate model which inter-relates both the real and nominal “fair†rates with the productivity growth rate in a single graphical scheme. Finally, the authors amend their own center-equilibrium underemployment model by this 45° “fair†rate model to produce a complex fair-rate-amended center-equilibrium underemployment model. This model incorporates Lavoie’s “fair†rate of interest into a fundamental-uncertainty-based model of underemployment with an endogenous money supply.