The Neo-Fisherian hypothesis: empirical implications and evidence?

The Neo-Fisher hypothesis is the idea, first suggested by Jim Bullard (FRB St. Louis Rev 92(5):339–352, 2010 ) and then thrown into the public debate by John Cochrane on his blog ( http://johnhcochrane.blogspot.com/ ), that trend inflation can be increased by increasing the nominal policy rate. The...

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Bibliographic Details
Published in:Empirical economics 2020-06, Vol.58 (6), p.2867-2888
Main Author: Crowder, William J.
Format: Article
Language:English
Subjects:
Econometrics
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Finance
Hypotheses
Inflation
Insurance
Interest rates
Macroeconomics
Management
Policy making
Statistics for Business
Trends
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Summary:The Neo-Fisher hypothesis is the idea, first suggested by Jim Bullard (FRB St. Louis Rev 92(5):339–352, 2010 ) and then thrown into the public debate by John Cochrane on his blog ( http://johnhcochrane.blogspot.com/ ), that trend inflation can be increased by increasing the nominal policy rate. The reasoning is that the Fisher relation must hold in the long run, so given a constant steady-state real rate of interest, raising the nominal interest rate will eventually lead to a higher inflation rate. Cochrane (Do Higher Interest Rates Raise or Lower Inflation? Hoover Institution, 2016 ) demonstrates that this Neo-Fisher result is consistent with virtually all dynamic general equilibrium macroeconomic models, like the new Keynesian and DGSE models employed by policymakers. The implication of the hypothesis is that an increase in expected (trend) inflation can be caused by an increase in nominal interest rates. An empirical analysis using US data reveals that, contrary to the Neo-Fisherian hypothesis, trend inflation causes nominal interest rates.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-018-1591-8