Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model / Julio Garín, Robert Lester, Eric Sims.

Format:

Book

Author/Creator:

Garín, Julio.

Contributor:

National Bureau of Economic Research.

Lester, Robert.

Sims, Eric.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22177.

NBER working paper series no. w22177

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

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.

Notes:

Print version record

April 2016.