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Raise Rates to Raise Inflation? Neo‐Fisherianism in the New Keynesian Model
Author(s) -
GARÍN JULIO,
LESTER ROBERT,
SIMS ERIC
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12459
Subject(s) - economics , keynesian economics , inflation (cosmology) , new keynesian economics , nominal interest rate , shock (circulatory) , real interest rate , monetary economics , interest rate , monetary policy , short run , macroeconomics , medicine , physics , theoretical physics
Increasing the inflation target in a 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 comovement between the nominal rates 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 that make the framework less forward‐looking make it less likely for the model to exhibit Neo‐Fisherianism.