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A Note on the Neo-Fisher Effect in the New Keynesian Model

Published online by Cambridge University Press:  10 November 2022

Syed Zahid Ali  and
Irfan A. Qureshi
Syed Zahid Ali*
Affiliation:
Lahore University of Management Sciences (LUMS), Lahore, Pakistan
Irfan A. Qureshi
Affiliation:
Asian Development Bank (ADB), Metro Manila, Philippines
*
*Corresponding author. Email: szahid@lums.edu.pk
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Abstract

Typically, contractionary monetary policy shocks increase the nominal and real rate of interest, which reduces both inflation and output . In contrast, the neo-Fisher effect (NFE) suggests that a transitory but persistent increase in the nominal rate of interest increases inflation in the short run. In a New Keynesian model augmented with several frictions, including the cost channel of monetary policy, real wage rigidity, habit formation in consumption, dampened expectations, and anticipated monetary policy shocks, we derive analytical conditions that give rise to (or avert) the NFE. We show that the NFE can arise due to the interplay between these frictions, and not only when the persistence of the policy shock is large, or when agents are forward-looking, as documented by the existing literature.

Keywords

Neo-Fisher effectcost channelanticipated shocks
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 7 , October 2023 , pp. 2012 - 2028
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

*

The views expressed in this paper are those of the author and do not necessarily reflect the views of the Asian Development Bank (ADB), the Boards of Directors, or the countries it represents.

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