The Neo-Fisher Effect in the United States and Japan

30 Pages Posted: 30 Oct 2017

See all articles by Martín Uribe

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2017

Abstract

I investigate the effects of an increase in the nominal interest rate on inflation and output in the United States and Japan during the postwar period. I postulate a structural autoregressive model that allows for transitory and permanent nominal and real shocks. I find that nominal interest-rate increases that are expected to be temporary, lead, in accordance with conventional wisdom, to a temporary increase in real rates that is contractionary and deflationary. By contrast, nominal interest-rate increases that are perceived to be permanent cause a temporary decline in real rates with inflation adjusting faster than the nominal interest rate to a higher permanent level. Estimated impulse responses show that inflation reaches its long-run level within a year. Importantly, because real rates are low during the transition, the economy does not suffer an output loss. This result is relevant for the design of monetary policy in economies plagued by chronic below-target inflation, for it is consistent with the prediction that a credible announcement of a gradual return of nominal rates to normal levels can bring about a swift convergence of inflation to its target level without negative consequences for aggregate activity.

Suggested Citation

Uribe, Martin, The Neo-Fisher Effect in the United States and Japan (October 2017). NBER Working Paper No. w23977, Available at SSRN: https://ssrn.com/abstract=3061658

Martin Uribe (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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