Working Paper: NBER ID: w22177
Authors: Julio Garn; Robert Lester; Eric Sims
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.
Keywords: No keywords provided
JEL Codes: E31; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in inflation target (E31) | increase in nominal interest rate (E43) |
| persistent increase in inflation target (E31) | increase in nominal interest rate (E43) |
| increase in inflation target (E31) | neofisherian behavior (C92) |
| forward-looking nature of the model (E17) | neofisherian behavior (C92) |
| rule-of-thumb price setters (D41) | elimination of neofisherian behavior (C92) |