Monetary policy, rational confidence, and Neo‐Fisherian depressions

Lucio Gobbi, Ronny Mazzocchi and Roberto Tamborini

Metroeconomica, 2022, vol. 73, issue 4, 1179-1199

Abstract: Why do economies fall into depression equilibria with output and inflation below target? What is the appropriate monetary policy? We examine the so‐called “Neo‐Fisherian” claim that, at the zero lower bound of the policy interest rate, and the economy in a depression equilibrium, in order to restore the desired inflation rate the policy rate should be raised consistently with the Fisher equation. To this end, we study a New Keynesian economy where we introduce a process of expectations formation, less explored in the relevant literature, such that agents, facing multiple equilibria, seek to figure out their subjective probabilistic beliefs about the future long‐run equilibrium of the economy (“normality”, with inflation and output reverting to target, or “depression”, with inflation and output remaining below target), driven by the observed state of the economy. Therefore, key to the macroeconomic process is the dynamic interaction between the agents' state of confidence in the return to normality and monetary policy. Differently from comparable works, we find that the Neo‐Fisherian claim is a theoretical possibility depending on the interplay of a set of parameters and very low levels of agents' confidence. Yet, on the basis of simulations of the model, we may say that this possibility is remote for most commonly found empirical values of the relevant parameters. Moreover, the Neo‐Fisherian policy‐rate peg is not sustained by the expectations formation process.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/meca.12398

Related works:
Working Paper: Monetary Policy, Rational Confidence and Neo-Fisherian Depressions (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:metroe:v:73:y:2022:i:4:p:1179-1199

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0026-1386

Access Statistics for this article

Metroeconomica is currently edited by Heinz D. Kurz and Neri Salvadori

More articles in Metroeconomica from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().