Positive Interest Rate, Stationary Economy, and Inefficiency

Abstract

This chapter analyses the direct impact of a positive rate of interest (usury) on the production possibility curve. Usury under a stationary state creates inefficiency in the sense that the marginal rate of transformation is not equal to the price ratio. Over the short run Pareto efficiency appears when a transition period is considered and the rate of return moving from one state to another is endogenous and equals the rate of investment. In a non-stationary economy, when a positive rate of return (interest) is equal to the growth rate of the economy, there will be a Pareto-efficient equilibrium. But if the interest rate is exogenous to the system, usury exists, and then Pareto efficiency cannot be achieved under any state, either stationary or non-stationary.