The nominal rate of interest, the rate of return on money, and inflationary expectations

This paper offers two modifications to the standard comparative-static analysis that help explain why nominal interest rates may either over- or under-adjust to a change in inflationary expectations, even in full general equilibrium: the inclusion of the real rate of return to money balances in commodity demand functions, and the presence of differing costs of obtaining information. In brief, the first factor may explain why nominal interest rates could over-adjust to a change in inflationary expectations, while the second may substitute for real balance effects in limiting the upward adjustment of nominal rates.