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The Neo-Fisherian hypothesis: empirical implications and evidence?

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  • William J. Crowder

    (University of Texas at Arlington)

Abstract

The Neo-Fisher hypothesis is the idea, first suggested by Jim Bullard (FRB St. Louis Rev 92(5):339–352, 2010) and then thrown into the public debate by John Cochrane on his blog (http://johnhcochrane.blogspot.com/), that trend inflation can be increased by increasing the nominal policy rate. The reasoning is that the Fisher relation must hold in the long run, so given a constant steady-state real rate of interest, raising the nominal interest rate will eventually lead to a higher inflation rate. Cochrane (Do Higher Interest Rates Raise or Lower Inflation? Hoover Institution, 2016) demonstrates that this Neo-Fisher result is consistent with virtually all dynamic general equilibrium macroeconomic models, like the new Keynesian and DGSE models employed by policymakers. The implication of the hypothesis is that an increase in expected (trend) inflation can be caused by an increase in nominal interest rates. An empirical analysis using US data reveals that, contrary to the Neo-Fisherian hypothesis, trend inflation causes nominal interest rates.

Suggested Citation

  • William J. Crowder, 2020. "The Neo-Fisherian hypothesis: empirical implications and evidence?," Empirical Economics, Springer, vol. 58(6), pages 2867-2888, June.
    • Handle: RePEc:spr:empeco:v:58:y:2020:i:6:d:10.1007_s00181-018-1591-8
    DOI: 10.1007/s00181-018-1591-8
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    Cited by:

    1. Sevda Yapraklı, 2022. "The Validity of The Neo-Fisher Effect in The Period of Explicit Inflation Targeting: An Econometric Analysis on Turkey," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 0(37), pages 85-105, December.
    2. Goyal, Ashima & Parab, Prashant, 2021. "What influences aggregate inflation expectations of households in India?," Journal of Asian Economics, Elsevier, vol. 72(C).
    3. Marques, André M. & Carvalho, André R., 2022. "Testing the neo-fisherian hypothesis in Brazil," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 407-419.

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    More about this item

    Keywords

    Neo-Fisher hypothesis; Long-run causality;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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