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What if neo-Fisherism was right?
Recent theoretical and empirical studies (see the Appendix) seem to show that neo- Fisherian theory is right: A temporary increase in the nominal interest rate leads to an increase in the real interest rate and to a fall in production and in inflation; But a permanent increase in the nominal interest rate very quickly leads to an identical increase in inflation, resulting in no effect on the real interest rate or on growth. The difference stems from the fact that a permanent increase in the nominal interest rate drives up expected inflation. The effects of a fall (temporary or permanent) in the nominal interest rate are of course the opposite. If neo- Fisherism is right, the implications for monetary policy are dramatic: when central banks keep nominal interest rates very low for a long period, they think that they are going to succeed in lifting inflation, whereas in reality they are depressing inflation and keeping the economy in deflation.
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Patrick Artus
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