econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 14 November 2016

How Neo-Fisherism Differs From Conventional Central Banking Wisdom

from the St Louis Fed

A recemt blog post discussed the conventional central banking wisdom regarding inflation control. Namely, raising the nominal interest rate target should lead to lower inflation and cutting the nominal interest rate target should lead to higher inflation. This post discusses Neo-Fisherian ideas, which suggest the opposite would hold.

In an article in The Regional Economist, Vice President and Economist Stephen Williamson wrote: “Neo-Fisherism says … that if the central bank wants inflation to go up, it should increase its nominal interest rate target, rather than decrease it, as conventional central banking wisdom would dictate. If the central bank wants inflation to go down, then it should decrease the nominal interest rate target."

The Fisher Effect

Williamson discussed a key component of essentially all macroeconomic models: A positive relationship exists between the nominal interest rate targeted by a central bank and inflation. This so-called Fisher effect is named for the early 20th century American economist Irving Fisher.

While this relationship is typically interpreted as involving causation running from inflation to the nominal interest rate, Williamson wrote, “what if we turn this idea on its head, and we think of the causation running from the nominal interest rate targeted by the central bank to inflation? This, basically, is what Neo-Fisherism is all about."

Williamson described a simple equation whereby the nominal interest rate R is expressed as the sum of the real (inflation-adjusted) interest rate r and future inflation π. That is, R = r + π.

He noted that mainstream macroeconomic models tend to predict the following response of the economy to a permanent, unanticipated increase in the nominal interest rate:

  • The real interest rate rises on impact (one-for-one initially).

  • Over time, the inflation rate increases gradually and the real interest rate falls.

  • In the long run, the inflation rate increases by the same amount as the nominal interest rate, and the real interest rate returns to its equilibrium rate.

(See Figure 2 in the article, “Neo-Fisherism: A Radical Idea, or the Most Obvious Solution to the Low-Inflation Problem?")

The Taylor Principle

Williamson posed the question of what could go wrong if central bankers do not recognize the importance of the Fisher effect in formulating monetary policy and they instead conform to conventional central banking wisdom.

He noted that conventional wisdom is embodied in the Taylor rule, which was proposed by economist John Taylor.1 “Taylor appears to have thought, in line with conventional central banking wisdom, that increasing the nominal interest rate will make the inflation rate go down, not up," Williamson said. In particular, the so-called Taylor principle calls for the nominal interest rate to increase more than one-for-one with an increase in the inflation rate.

Consequently, if the inflationary process works as described above but a central bank follows the Taylor principle, Williamson said that macroeconomic theory predicts the central banker would almost inevitably arrive at the zero lower bound on nominal interest rates.

“Neo-Fisherian denial will tend to produce inflation lower than central banks’ inflation targets and nominal interest rates that are at central banks’ effective lower bounds - the low-inflation policy trap," he wrote.

The final blog post in this series will discuss the low-inflation policy trap and how central banks typically respond in such a situation.

Notes and References

1 Taylor, John. “Discretion versus Policy Rules in Practice." Carnegie-Rochester Series on Public Policy, 1993, Vol. 39, pp. 195-214.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2016/november/how-neo-fisherism-differs-conventional-wisdom

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Angst in America, Part 5: The Crisis We Can’t Muddle Through
Was Marx Right?
News Blog
What We Read Today 28 April 2017
Kim Jong Un Pretends To Fly An Airplane
21 April 2017: ECRI's WLI Growth Index Continues to Slow
Final April 2017 Michigan Consumer Sentiment Continues Positive Trend
April 2017 Chicago Purchasing Managers Barometer New Orders Close To Three-Year High
Advance Estimate 1Q2017 GDP Quarter-over-Quarter Growth at 0.7 Percent.
Rail Week Ending 22 April 2017: Marginally Slower Week
March 2017 Median Household Income Not Significantly Different
Infographic Of The Day: The Largest Company Headquartered In Each State
Early Headlines: Asia Stocks Down, Dollar, Oil, And Gold All Up, Trump Will Pay ACA $, State Dept To Cut 9%, Trump Tax Plan, UK House Prices Drop, France GDP Growth Slows, And More
What Americans Shop For With Coupons Online
Fact Check: Are A Million African Migrants Already On Their Way To Europe?
Doctor Google Will See You Now
Investing Blog
Think Differently For Better Trading Results
Facebook Is Coming After Snapchat From All Sides
Opinion Blog
Trump's Tax Plan Is Brilliant Politics And Even Better Economics
Facts Are Not Always More Important Than Opinions: Here's Why
Precious Metals Blog
A New Age For Gold
Live Markets
28Apr2017 Market Close: Wall Street Closed Mostly Down On News The U.S. Economy Grew At Its Weakest Pace In Three Years, WTI Crude Settles In The Low 49 Handle
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved