A Primer on Neo-Fisherian Economics

Robert Amano, Thomas Carter and Rhys Mendes ()

Staff Analytical Notes from Bank of Canada

Abstract: Conventional models imply that central banks aiming to raise inflation should lower nominal rates and thus stimulate aggregate demand. However, several economists have recently challenged this conventional wisdom in favour of an alternative “neo-Fisherian’’ view under which higher nominal rates might in fact lead to higher inflation. In this note, we show that a simple New Keynesian model can indeed deliver a neo-Fisherian link from higher nominal rates to higher inflation. However, the conditions under which this link emerges include a configuration of fiscal and monetary policy, which departs substantially from the configuration normally assumed in the New Keynesian literature. In particular, this configuration involves a commitment that the central bank will not respond too aggressively if inflation is off target, in the sense that policy will be set in a manner inconsistent with the Taylor principle. Active use of inflation to manage real government debt would also be needed. We identify significant challenges associated with both these conditions and argue that they militate against policies that aim to exploit the neo-Fisherian mechanism.

Keywords: Central bank research; Economic models; Inflation and prices; Interest rates; Monetary policy framework; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsan:16-14

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