The evidence
Martín Uribe econometrically examines whether the Neo-Fisher effect is present in US data. He finds that:
- In response to a permanent increase in the nominal interest rate, inflation increases immediately, reaching its higher long-run level within a year;
- The adjustment to a permanent increase in the nominal interest rate entails no output loss and is characterized by low real interest rates and;
- In both the empirical and optimizing models permanent monetary shocks are estimated to be the main drivers of inflation, explaining 45 percent of the variance of changes in this variable.
The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models
Author: Martín Uribe
From: Columbia University
The Neo-Fisher effect under imperfect information
Lukmanova and Rabitsch estimate a New-Keynesian model with perfect and imperfect information using US data. Their results show that:
- In the estimated model under full information a target shock raises inflation expectations and thus actual inflation immediately. The nominal interest rate and economic activity rise, providing evidence in favor of a Neo-Fisher effect;
- In the case of the estimated model under imperfect information, inflation expectations (and actual inflation) adjust upward only with a lag in response to the target increase, so that interest rates co-move negatively with inflation and output initially, and Neo-Fisherian effects come into play only with a lag of about four to five quarters.
New Evidence on Monetary Transmission: Interest Rate versus Inflation Target Shocks
Authors: Elizaveta Lukmanova, Katrin Rabitsch
From: KU Leuven, Vienna University of Economics
