Direct price controls as a source of instability in the interest rate/inflation rate relationship

We hypothesize that an efficient capital market is more concerned with effective inflation rates (which investors experience) than ‘official’ ones (which econometricians observe), and that direct consumer goods price controls are likely to result in disparity between the two. Consequently, direct price controls are also likely to affect the interest/measured inflation rate relationship. We ropose a dummy variable approach which enables us to explore empirically the effects of such controls on the interest/inflation rate relationship in the context of Dwyer's (1981) model. Using Euro rates and inflation rates of the respective countries we explore the impact of the control programmes imposed in the 1970's by governments of the united States, Canada and France. France.