Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model

Julio Garin, Robert Lester () and Eric Sims ()

No 22177, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Increasing the inflation target in a textbook New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short run co-movement between the nominal interest rate and inflation conditional on a nominal shock as Neo-Fisherianism. We show that the NK model is more likely to be Neo-Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo-Fisherianism is driven by the forward-looking nature of the model. Modifications which make the framework less forward-looking make it less likely for the model to exhibit Neo-Fisherianism. As an example, we show that a modest and empirically realistic fraction of "rule of thumb" price-setters may altogether eliminate Neo-Fisherianism in the textbook model.

JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-pr~, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (9)

Published as JULIO GARÍN & ROBERT LESTER & ERIC SIMS, 2018. "Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model," Journal of Money, Credit and Banking, vol 50(1), pages 243-259.

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