Fishing for Fisher

The best (or worst) thing about economics is that you constantly have different groups of very intelligent people saying exactly the opposite and not reaching a consensus.

The great hype recently is Neo-Fisherism, which can be roughly translated in “All Central Banks got it wrong”.


A Central Bank that wants to achieve a higher level of inflation will usually issue more money or decrease its policy interest rate, to stimulate aggregate demand…and eventually inflation! No big deal.

But a Neo-Fisherite will say that, as real interest rates should not be affected by monetary shocks an increase in nominal interest rates causes a similar increase in inflation. So…the opposite of Central Bank’s thinking.

I guess the main hypothesis in NF is the stability of the real interest rate, if you assume that away, basic macroeconomics functions in the “right” direction, as Nick Rowe would say.

Let’s break it in parts then:

When a Central Bank is “feeling expansionary” and tries to increase monetary expansion, that will have (at least) two important effects (one direct, the other success-dependent):

1.The first one, the liquidity effect will decrease interest rates as more money pursuing the same number of assets increase their prices and therefore reduces interest rates.

2. The second one, (success dependent) is the famous Fisher effect. So…will it reverse the first one? I guess it can. Imagine that your monetary expansion reduces interest rates directly through the liquidity effect but increases inflation expectations so much that investors will demand a higher interest rate (to guarantee the stability of the real interest rate). Success!! (as proved by the figure used in Larry Summers blog) Each round of QE (“money injection”) increased interest rates after all.figure-3-10-year-3-month-spread-and-qe-768x557

Maybe it’s just me that still can’t understand Steven Williamson’s argument, but I guess Central Banking has been very successful here.

And in the end it’s all about Milton Friedman’s “high interest rates means money has been loose” and not “high interest rates causes loose money”.

Please don’t twist your causalities!

(Not being a NF I don´t get Roger Farmer’s argument to raise interest rates, but then again… he is too smart for me)


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