John Cochrane Explains Neo-Fisherism

Uneasy Money

In a recent post, John Cochrane, responding to an earlier post by Nick Rowe about Neo-Fisherism, has tried to explain why raising interest rates could plausibly cause inflation to rise and reducing interest rates could plausibly cause inflation to fall, even though almost everyone, including central bankers, seems to think that when central banks raise interest rates, inflation falls, and when they reduce interest rates, inflation goes up.

In his explanation, Cochrane concedes that there is an immediate short-term tendency for increased interest rates to reduce inflation and for reduced interest rates to raise inflation, but he also argues that these effects (liquidity effects in Keynesian terminology) are transitory and would be dominated by the Fisher effects if the central bank committed itself to a permanent change in its interest-rate target. Of course, the proviso that the central bank commit itself to a permanent interest-rate peg is a pretty…

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This entry was posted in applied price theory on by .

About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at https://utopiayouarestandinginit.wordpress.com/2014/03/12/why-call-my-blog-utopia-you-are-standing-in-it/

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