Correlations between nominal interest rates, real interest rates and inflation

Everything starts from the Fisher relationship: Nominal interest rate   =   Real interest rate   +   ( Expecte d ) inflation If the time horizon is sufficiently long, expected inflation is the same as inflation. We can then look at the effects of an expansionary monetary policy that leads to lower nominal interest rates. In the short run, it is expected to stimulate the economy by driving down real interest rates and therefore boosting inflation. In the long run, the traditional view is that monetary policy has no effect on real interest rates. A lasting fall in nominal interest rates would therefore lead to an identical fall in inflation (this is the neo-Fisherian view). But monetary policy may continue to influence real interest rates even in the long run and the effect of changes in nominal interest rates may be more complicated. We look at the correlations between changes in nominal interest rates, real interest rates and inflation across various horizons in the United States and the euro zone. We find that: In the short run, an expansionary monetary policy is associated with a fall in real interest rates, but not with an upturn in inflation; In the long run, an expansionary monetary policy (fall in nominal interest rates) leads to lower nominal interest rates, real interest rates and inflation. So there seems to be no hope that expansionary monetary policies will lift inflation, whatever the time horizon.