The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models
46 Pages Posted: 24 Sep 2018 Last revised: 22 Jul 2023
Date Written: September 2018
Abstract
This paper investigates whether permanent monetary tightenings increase inflation in the short run. It estimates, using U.S. data, an empirical and a New-Keynesian model driven by transitory and permanent monetary and real shocks. Temporary increases in the nominal interest-rate lead, in accordance with conventional wisdom, to a decrease in inflation and output and an increase in real rates. The main result of the paper is that permanent increases in the nominal interest rate lead to an immediate increase in inflation and output and a decline in real rates. Permanent monetary shocks explain more than 40 percent of inflation changes.
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