My personal interpretation of "Turn of the Screw" is that the ghosts are quite real. Otherwise, for me, it just ends up being -- "Oy, another wacko who thinks there are ghosts... ka-CHING!"
I've read "The Turn of the Screw" several times over the past 20 years, and my conclusion after close, analytical reading is that Henry James deliberately created the story so as to be ambiguous. On the surface, it's a ghost story -- and I believe from some of the academic criticism I've read, that it was quite a while (decades) before some critic first proposed the theory that the ghosts were figments of the governess's imagination. I do think that James cunningly suggests that possibility, too, though there are still aspects to the story that argue against the psychological explanation.
I have a hard time buying into the idea that the ghosts were creations of the governess' overheated mind as a reaction to repressed sexuality. But then I'm not a big fan of Freud, whose theories receive little credence from scientifically oriented psychologists today. I don't know if even Freud had a case study where sexual repression led to someone seeing ghosts, but I doubt that there's much evidence to support the theory outside of Freudian fantasies.
It's interesting that the governess does act in the manner of a medieval Inquisitor, though, and there are hints that she has romantic attractions to the uncle.
I wasn't overly impressed with "The Innocents" when I first saw it, after reading high praises for it here, primarily because I didn't like when it departed from the novella. Seeing it a second and third time, though, my opinion has completely changed and I accept the movie not as a line-by-line adaptation of the book but as an interpretation of it, and as such I find it a visually stunning piece of artistry.
Didn't know it was on AMC, since like Gerard I stopped watching AMC long ago. I think the commercial breaks would especially ruin one's viewing of "The Innocents," though if they showed the widescreen version I would have taped it. My tape is the "formatted to fit your TV screen" version and I know there's one scene at least where two people are talking to each other and you only see the tips of their noses.
Let's hope the studio executives see the value of a DVD release (along with "Eye of the Devil" and many others ...).